Verastem Oncology
Annual Report 2011

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One) xxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the fiscal year ended December 31, 2011 or ooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the transition period from to Commission file number 001-35403 Verastem, Inc.(Exact name of registrant as specified in its charter) Delaware27-3269467(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.) 215 First Street, Suite 440Cambridge, Massachusetts02142(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (617) 252-9300 Securities registered pursuant to Section 12(b) of the Act: Title of each className of each exchange on whichregisteredCommon Stock, $0.0001 par valueNASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. o Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. x Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). x Yes o No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer oAccelerated filer o Non-accelerated filer xSmaller reporting company o(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock onMarch 15, 2012: $111,565,370. The registrant has provided this information as of March 15, 2012 because its common stock was not publicly traded asof the last business day of its most recently completed fiscal quarter. The number of shares outstanding of the registrant’s common stock as of March 15, 2012 was 21,059,116. Table of Contents TABLE OF CONTENTS PART IItem 1.Business5Item 1A.Risk Factors42Item 1B.Unresolved Staff Comments70Item 2.Properties70Item 3.Legal Proceedings70Item 4.Mine Safety Disclosures70 PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities71Item 6.Selected Financial Data73Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations75Item 7A.Quantitative and Qualitative Disclosures About Market Risk86Item 8.Financial Statements and Supplementary Data86Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure86Item 9A.Controls and Procedures86Item 9B.Other Information87 PART IIIItem 10.Directors, Executive Officers and Corporate Governance88Item 11.Executive Compensation91Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters110 2Table of Contents Item 13.Certain Relationships and Related Transactions, and Director Independence113Item 14.Principal Accountant Fees and Services118 PART IVItem 15.Exhibits and Financial Statement Schedules119 SIGNATURES120 3Table of Contents FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. All statements, other thanstatements of historical facts, contained in this Annual Report on Form 10-K, including statements regarding our strategy, future operations, future financialposition, future revenues, projected costs, prospects, plans and objectives of management, are forward looking statements. The words “anticipate,” “believe,”“estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similarexpressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The forward-looking statements in this Annual Report on Form 10-K include, among other things, statements about: · our ongoing and planned discovery and development of drugs targeting cancer stem cells; · our expectations regarding the role of cancer stem cells in tumor recurrence and metastasis; · the potential advantages of our proprietary technology; · our ability to acquire or in-license any compounds or product candidates from third parties that we identify using our proprietarytechnology or otherwise; · our plans to develop and commercialize our product candidates and companion diagnostics; · our ability to establish and maintain collaborations; · the timing of and our ability to obtain and maintain regulatory approvals for our product candidates; · the rate and degree of market acceptance and clinical utility of our products; · our intellectual property position; · our expectations regarding the use of proceeds from our initial public offering; and · our estimates regarding expenses, future revenues, capital requirements and needs for additional financing. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue relianceon our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-lookingstatements we make. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in the “RiskFactors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-lookingstatements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to the Annual Report on Form 10-K completely andwith the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 4Table of Contents PART I Item 1. Business OVERVIEW We are a biopharmaceutical company focused on discovering and developing proprietary small molecule drugs targeting cancer stem cells in breast and othercancers along with proprietary companion diagnostics. A cancer stem cell is a particularly aggressive type of tumor cell, resistant to conventional cancertherapy, that we believe is an underlying cause of tumor recurrence and metastasis. Our scientific co-founders, Robert Weinberg, Ph.D., Eric Lander, Ph.D.,and Piyush Gupta, Ph.D., have made discoveries that link the epithelial-to-mesenchymal transition, or EMT, to the emergence of cancer stem cells. Thistransition involves the transformation of one type of cancer cell into a more aggressive and drug resistant type of cancer cell. Building on these discoveries, ourscientific co-founders developed proprietary technology to create a stable population of cancer stem cells that we use to screen for and identify small moleculecompounds that target cancer stem cells. We expect to initiate clinical trials with VS-507 and one of either VS-4718 or VS-5095 over the next 12 to 15months. Cancer is a group of diseases characterized by uncontrolled growth and spread of abnormal cells. The American Cancer Society estimates that in the UnitedStates in 2011, approximately 1.6 million new cases of cancer will be diagnosed and nearly 600,000 people will die from the disease. Current treatments forcancer include surgery, radiation therapy, chemotherapy, hormone therapy and targeted therapy. According to estimates by the National Institutes of Health, inthe United States in 2010, the direct medical costs of cancer of all types exceeded $100 billion. IMS Health estimates that in the United States in 2010,approximately $22 billion was spent on drugs to treat cancer, representing the largest class of drug spending in the United States. Despite years of intensiveresearch and clinical use, current treatments often fail to cure cancer. We believe that a key reason for the ultimate failure of many current therapies to achieve a durable clinical response may be the presence of cancer stem cells,or CSCs, which are also sometimes referred to as tumor-initiating cancer cells, within tumors. CSCs have been identified in many types of cancer, includingbreast, pancreatic, colon, brain, lung and leukemia. Following many cancer treatments, the tumor can remain with a high percentage of CSCs and becomemore aggressive and resistant to further treatment. In addition, patients who relapse often develop metastatic disease in which the cancer spreads to other sitesin the body. Tumor metastasis to critical organs is the cause of more than 90% of cancer deaths. We believe that it is the drug resistance and ability of CSCs tospread to other sites in the body that may be the root causes of these failed therapies. Accordingly, our mission is to develop drugs targeting CSCs that either incombination with other cancer treatments or alone can kill all of the cells comprising a tumor and, thus, create a durable clinical response. We license our EMT technology from the Whitehead Institute for Biomedical Research, an affiliate of the Massachusetts Institute of Technology, or MIT, andthe President and Fellows of Harvard College, or Harvard. We also have a first right to negotiate a license for additional related intellectual property from theBroad Institute, an affiliate of MIT and Harvard University, pursuant to which we have licensed intellectual property that relates to compounds identifiedusing EMT technology that target CSCs. Using our proprietary technology, we can create a stable population of CSCs in the laboratory for use in rapid andautomated assays, referred to as high-throughput screening, to enable discovery of novel drugs targeting these CSCs. We are using our discovery approach toidentify a pipeline of small molecule compounds with the potential to target CSCs. Our most advanced product candidates are VS-507, VS-4718 and VS-5095. We are currently evaluating these compounds in preclinical studies as potentialtherapies for breast and other cancers. We believe that these compounds may be especially beneficial as therapeutics in aggressive cancers with a highpercentage of CSCs, 5Table of Contents such as triple negative breast cancer, or TNBC. TNBC is a type of breast cancer in which a high percentage of CSCs has been identified and that has apoorer prognosis and lower overall survival rate than other types of breast cancer. Using our EMT technology, our scientific co-founders identified VS-507 as a drug candidate for killing breast CSCs. Their research on VS-507, whichincluded an analysis of the effect of VS-507 on cell lines derived from TNBC, was published in the peer reviewed scientific journal Cell in 2009. Recentlypublished third-party research has reported that VS-507’s activity may be mediated through the blockade of the Wnt/beta-catenin cell signaling pathway, anetwork of proteins that Dr. Weinberg described in 2011 in Cell as critical for the development and maintenance of CSCs. In mouse models of breast cancer,VS-507 treatment decreased biophysical or biochemical markers, referred to as biomarkers, of CSCs. In contrast, treatment in the same model with astandard chemotherapeutic agent, paclitaxel, increased biomarkers of CSCs. We identified the CSC-targeted activity of VS-4718 and VS-5095 using our proprietary technology. In preclinical testing, these compounds were found to bepotent and selective inhibitors of Focal Adhesion Kinase, or FAK, a protein which is involved in cell adhesion and motility. FAK expression is greater in manytumor types compared to normal tissue, particularly in cancers that have a high invasive and metastatic capability. In preclinical mouse models, both VS-4718 and VS-5095 demonstrated good oral bioavailability and pharmacokinetic and pharmacodynamic properties and effectively reduced both primarytumor growth and metastatic burden. An important element of our business strategy is the development and use of proprietary, companion diagnostics in connection with the development of ourtherapeutic drug candidates. We plan to use these diagnostics as part of a personalized medicine approach to identify patients with aggressive cancers that havea high percentage of CSCs, which is the group that we believe will benefit most from our therapies. We also believe that these diagnostics may be used tomonitor patients’ progress on therapy and aid physicians’ ongoing treatment decisions. OUR MANAGEMENT TEAM AND SCIENTIFIC CO-FOUNDERS AND ADVISORS Our experienced management team includes our President and Chief Executive Officer, Chairman and co-founder Christoph Westphal, M.D., Ph.D., ourChief Operating Officer, Robert Forrester, and our Vice President, Head of Research, Jonathan Pachter, Ph.D. Dr. Westphal has been involved in founding anumber of biotechnology companies as chief executive officer, including Sirtris Pharmaceuticals, Inc., which was acquired by GlaxoSmithKline plc in 2008,as well as Alnylam Pharmaceuticals, Inc. and Momenta Pharmaceuticals, Inc. Dr. Westphal also co-founded Alnara Pharmaceuticals, Inc., which wasacquired by Eli Lilly and Co. in 2010. Mr. Forrester has been the chief executive officer, chief operating officer and chief financial officer of both private andpublic life science companies, including Forma Therapeutics, Inc., CombinatoRx, Inc., now Zalicus Inc., and Coley Pharmaceutical Group, Inc., which wasacquired by Pfizer Inc. in 2007. Dr. Pachter has over 20 years of experience in leading the discovery of small molecule and monoclonal antibody therapeuticsfor the treatment of cancer, most recently as the Senior Director of Cancer Biology at OSI Pharmaceuticals Inc., which was acquired by Astellas Pharma Inc.in 2010. Our scientific co-founders are recognized leaders in the field of cancer biology. Robert Weinberg, Ph.D., Founding Member of the Whitehead Institute andProfessor of Biology at MIT, has played a key role in identifying the genetic basis of cancer. Dr. Weinberg discovered the first tumor oncogene, the first tumorsuppressor gene, the role of a protein related to the cell surface receptor HER2 in preclinical studies and the mechanisms underlying the formation of CSCs.Eric Lander, Ph.D., Founding Director of the Broad Institute, 6Table of Contents Professor of Biology at MIT and Professor of Systems Biology at Harvard Medical School, played a central role in the Human Genome Project. Piyush Gupta,Ph.D., Member of the Whitehead Institute and Assistant Professor of Biology at MIT, co-developed with Dr. Lander and Dr. Weinberg our proprietary EMTtechnology for use in the identification of drugs targeting CSCs and a genetic expression signature, useful as a biomarker, to monitor the effect of treatment. Our management team is supported by our scientific advisory board comprised of leading academic and industry scientists. Our scientific advisory boardconsists of: Scientific advisory boardRobert Weinberg, Ph.D.Scientific co-founderFounding Member of the Whitehead Institute for Biomedical Research, Professor of Biology at theMassachusetts Institute of Technology and recipient of the 1997 National Medal of ScienceEric Lander, Ph.D.Scientific co-founderFounding Director of the Broad Institute, Professor of Biology at the Massachusetts Institute of Technologyand Professor of Systems Biology at Harvard Medical SchoolPiyush Gupta, Ph.D.Scientific co-founderMember of the Whitehead Institute for Biomedical Research and Assistant Professor of Biology at theMassachusetts Institute of TechnologyJulian Adams, Ph.D.President of Research and Development of Infinity Pharmaceuticals, Inc., former Senior Vice President ofDrug Discovery and Development of Millennium Pharmaceuticals, Inc. and co-inventor and co-developer ofVelcadeJosé Baselga, M.D., Ph.D.Chief of Hematology and Oncology at Massachusetts General Hospital, Associate Director of theMassachusetts General Hospital Cancer Center and Professor of Medicine at Harvard Medical SchoolGeorge Daley, M.D., Ph.D.Professor of Hematology and Oncology and Director of the Stem Cell Transplantation Program at Children’sHospital and Professor of Biological Chemistry and Molecular Pharmacology at Harvard Medical SchoolPeter Elliott, Ph.D.Former Senior Vice President and Head of Research and Development of Sirtris Pharmaceuticals, Inc.,former Vice President of Pharmacology and Drug Development of Millennium Pharmaceuticals, Inc. and co-developer of VelcadeDaniel Haber, M.D., Ph.D.Director of the Massachusetts General Hospital Cancer Center and Professor of Medicine at HarvardMedical SchoolJoseph (Yossi) Schlessinger, Ph.D.Chairman and Professor in the Department of Pharmacology at Yale School of MedicinePhillip A. Sharp, Ph.D.Institute Professor at the David H. Koch Institute for Integrative Cancer Research at the MassachusettsInstitute of Technology and recipient of the 1993 Nobel Prize in Medicine and PhysiologyRoger Tung, Ph.D.President and Chief Executive Officer of Concert Pharmaceuticals, Inc., former Vice President of DrugDiscovery of Vertex Pharmaceuticals, Inc. and co-inventor of Lexiva and AgeneraseChristopher Walsh, Ph.D.Hamilton Kuhn Professor in the Department of Biological Chemistry and Molecular Pharmacology atHarvard Medical SchoolEric Winer, M.D.Director of the Breast Oncology Center at the Dana Farber Cancer Institute and Professor of Medicine atHarvard Medical School 7Table of Contents THE PROBLEM The cancer death rate in the United States has only decreased modestly since the early 1990s. Cancer remains one of the world’s most serious health problemsand is the second most common cause of death in the United States after heart disease. The American Cancer Society estimates that in the United States in2011, approximately 1.6 million new cases of cancer will be diagnosed and nearly 600,000 people will die from the disease. According to estimates by theNational Institutes of Health, in the United States in 2010, the direct medical cost of cancer of all types exceeded $100 billion and the cancer type responsiblefor the highest individual disease costs was breast cancer at $16.5 billion. The following table sets forth the U.S. annual incidence, based on 2011 estimatesfrom the American Cancer Society, and the prevalence, or the number of people in the United States who have been previously diagnosed with cancer, basedon 2010 estimates from the National Cancer Institute, for select cancers in which CSCs have been implicated. Cancer typeU.S. annual incidenceU.S. prevalenceBreast230,4802,645,621Lung and bronchus221,130373,489Colorectal141,2101,110,077Leukemia44,600253,350Pancreatic44,03034,657Brain and other nervous system cancers22,340128,193 For tumors that have not yet metastasized and remain localized to the site of original tumor formation, current treatments for cancer can be effective in initiallyreducing tumor burden. However, for many forms of cancer, current treatments lack sufficient efficacy to achieve a durable clinical response. Following initialtreatment, the tumor may recur at the same site or metastasize and spread to other sites in the body. The vast majority of patients who succumb to cancer arekilled by tumors that have metastasized. This is illustrated by the information in the following table, which shows, according to the National CancerInstitute’s SEER Cancer Statistics Review, 2001-2007, the reduction in five-year survival rate for breast cancer patients based on the stage of the disease atthe time at which the disease is diagnosed. The percentage of patients diagnosed at each stage of disease, referred to as stage distribution, is included below forcomparative purposes. Breast cancer stage at diagnosisStage distribution(1)Five-year relativesurvival rateLocalized (confined to primary site)60%98.6%Regional (spread to regional lymph nodes)33%83.8%Distant (cancer has metastasized)5%23.4% (1) 2% of breast cancer cases were designated as unknown stage. With the application of new technologies and key discoveries, we believe that we are now entering an era of cancer research characterized by a moresophisticated understanding of the biology of cancer. We believe that the discovery of CSCs and the role that they play in cancer development are importantnew insights that present the opportunity to develop more effective treatments. Epithelial-to-mesenchymal transition In most solid tumors, the cells that make up the tissue mass have a characteristic epithelial appearance. Epithelial cells generally have a multi-sided, uniformshape. Epithelial cells also have well-defined contact 8Table of Contents points with neighboring cells and a strong attachment to the underlying connective tissue that creates a framework for solid tumors in the body. Epithelial cellsgenerally lack the ability to separate from these connection points to move, invade or metastasize into surrounding tissue or other sites in the body. Epithelial cells can undergo a transformation to a different cell type, called mesenchymal cells, through a process called epithelial-to-mesenchymal transition,or EMT. In contrast with epithelial cells, mesenchymal cells have an elongated spindle shape, lack orderly contacts with neighboring cells and can survivewithout contact with a surface or connective tissue. The EMT process is a series of reprogramming events that normally operates during the development oftissues and organs prior to birth. However, the EMT process also can be appropriated by epithelial cancer cells that are referred to as carcinoma cells. Whenepithelial carcinoma cells residing in a solid tumor undergo the EMT process, the resulting mesenchymal cancer cells have the capability to invade throughlocal barriers and metastasize to other sites in the body. Another consequence of epithelial carcinoma cells undergoing the EMT process is that the resulting mesenchymal cancer cells have significantly increasedresistance to current cancer treatments. Retrospective analyses of data from two Phase 3 clinical trials in lung cancer, one published in Clinical CancerResearch in 2005 and the other presented at the 2009 World Conference on Lung Cancer, revealed that patients with high expression of epithelial biomarkersresponded better to the anti-cancer drug Tarceva in terms of both progression-free survival and overall survival than patients in the same two trials with lowlevels of epithelial biomarkers in their tumors. These results suggest that the mesenchymal cancer cell population, which lacks epithelial biomarkers, isresistant to these therapies. These clinical observations are consistent with preclinical studies published in Cancer Research in 2005 reporting that lungcancer cells expressing mesenchymal biomarkers appeared to be resistant to Tarceva and other targeted anti-cancer agents when transplanted into mice. Cancer stem cells We believe that CSCs, which are sometimes referred to as tumor-initiating cancer cells, are responsible for the initiation, metastasis and recurrence of manycancers. CSCs have the ability to: · move freely and proliferate without attachment to other cells or surfaces; · initiate a tumor; · self-renew; · produce other cancer cell types; and · resist many current cancer treatments. CSCs are often characterized by a distinctive set of biomarkers, which we believe may be a key to identifying patients with tumors that are likely to respondto therapies targeting CSCs. CSCs may be more resistant to current cancer treatments than other types of cancer cells. Thus, as illustrated in the figure below, while current treatmentsmay succeed at initially decreasing tumor burden, they may leave behind a population of CSCs that can regenerate tumors. Therefore, the presence of amixture of CSCs and other types of cancer cells within a tumor may necessitate a therapeutic approach combining drugs that can kill both cell populations. 9Table of Contents The need to target CSCs may apply across the treatment of a broad range of cancers. CSCs have been isolated and characterized from many types of cancer,including breast, pancreatic, colon, brain, lung and leukemia. The CSCs isolated from each of these tumor types have been found to confer greater tumor-forming capability when transplanted into mice than other types of cancer cells from the same tumor. Several specific signaling pathways have been implicated in CSC biology. The combined action in vitro of the TGF-beta and Wnt signaling pathways in theformation and survival of CSCs was described by Dr. Weinberg in Cell in 2011. Separately, FAK has been found to increase the metastatic capability ofbreast cancer cells following the EMT process. CSCs from breast cancer have been characterized in several studies. For example, in a study conducted at the Baylor College of Medicine, breast cancerbiopsies were taken from patients at the time of initial diagnosis and again following 12 weeks of treatment with docetaxel, a standard cancer chemotherapywidely used to treat breast cancer. The biopsies taken after 12 weeks of treatment showed increased expression of biomarkers for CSCs and an increasednumber of chemoresistant cells as compared to biopsies taken at the time of initial diagnosis. This result indicates that the CSC component of the tumor wasrelatively resistant to the chemotherapy. Moreover, it supports our belief that either a combination of treatments or a single therapy that can effectively targetboth CSCs and other types of cancer cells is critical to create a durable clinical response. OUR SOLUTION Our solution is to discover and develop a next generation of oncology therapeutics targeting cancer stem cells along with companion diagnostics. We believe thatby developing therapeutics that target CSCs we can address the problem of cancer recurrence and metastasis and create a durable clinical response. Our scientific co-founders at the Whitehead Institute and the Broad Institute made discoveries linking the activation of the EMT process in epithelial cancercells to the emergence of CSCs. Their studies demonstrated that the EMT process can be activated in vitro by forcing a higher level of expression of genes thatdirect the EMT process or by eliminating key epithelial proteins. The mesenchymal cancer cells that emerge from this induced EMT process have thehallmarks of CSCs, including tumor-forming ability and increased resistance to chemotherapeutic drugs. Our solution utilizes proprietary technology basedon the discovery linking the EMT process to the emergence of CSCs. We use this technology along with high-throughput screening methods to identify drugstargeting CSCs and develop companion diagnostics. To achieve a durable clinical response, we believe that it may be necessary to kill both CSCs and othertypes of cancer cells in a tumor, as illustrated in the figure below, either with a combination of current cancer treatments and CSC-targeted drugs or a singletherapeutic found to target both cancer cell populations. 10Table of Contents Our proprietary technology A persistent problem in the discovery of drugs targeting CSCs is the difficulty of isolating large numbers of CSCs. Without such large numbers, thediscovery of drugs targeting CSCs using high-throughput screening is extremely difficult. Moreover, when CSCs are isolated, they typically do not remainstable in culture. Instead, over a short period of time, CSCs convert into other types of cancer cells. To address this problem, our scientific co-foundersdeveloped proprietary technology based on the EMT process to create a stable population of CSCs that are suitable for use in high-throughput screening ofsmall molecule compounds. These stable CSCs are similar to natural CSCs in that they are drug resistant and capable of forming new tumors. We license our EMT technology from the Whitehead Institute. Through December 31, 2011, we and scientists at the Whitehead Institute and the BroadInstitute had used our technology and high-throughput screening methods to evaluate the ability of over 320,000 compounds to kill CSCs. We hold exclusivelicense rights to compounds and uses identified under our agreement with the Whitehead Institute. We also hold a right of first negotiation to compoundsidentified under our agreement with the Broad Institute and have licensed one such compound pursuant to that right. To identify compounds that are selective for CSCs, we grow cancer non-stem cells in the laboratory and then induce the EMT process to create a stablepopulation of CSCs. As illustrated in the figure below, we then screen compounds to assess their ability to kill the CSCs. Because these CSCs are stable inculture, the screening process can be conducted using high-throughput technology on a large number and wide variety of small molecule compound libraries.These compound libraries include new chemical entities, or NCEs, approved drugs and compounds that are in preclinical and clinical development. We thenprofile the compounds that are identified as selective for CSCs using additional assays to identify suitable clinical candidates.  Biomarkers and diagnostics Because of the high level of toxicity of traditional chemotherapies and the variability in response of tumors to these treatments, it is critically important to getthe right cancer drug to the right patient. As a result, the oncology field has been at the forefront of developing diagnostics to select patients who may benefitfrom specific therapies, which is sometimes referred to as personalized medicine. We plan to build on the methods 11Table of Contents incorporated in our EMT technology to develop diagnostics designed to enhance our ability to deliver the right drug to the right patient. In particular, we are identifying specific protein and gene biomarkers that are either present or conspicuously absent in CSCs. We are also developing panelsof multiple biomarkers, which we believe may be more effective at identifying CSCs than individual biomarkers alone. We believe that our diagnostics willenable us to identify patients with aggressive cancers that have a high percentage of CSCs. We further believe that these patients are the most likely to benefitfrom our drug candidates. By screening to identify these patients, we expect to be able to select appropriate patients for enrollment in our clinical trials andultimately, if we obtain marketing approval, patients who are likely to respond to our therapies. We also plan to use these diagnostics to measure the selectivekilling of CSCs by our drug candidates as one of the ways of determining their efficacy. We expect that our use of proprietary diagnostics may accelerate the clinical development process for our drug candidates by enabling smaller, targeted trials.We believe that use of these diagnostics may provide early, objective signals of drug activity to guide us to optimal dosing and the sequencing of agents morequickly. We also believe that this approach may ultimately enable physicians to identify patients who are likely to benefit most from these therapies and makebetter clinical decisions during therapy. We are working on companion diagnostics for our therapeutic programs based on both in-licensed and internally developed technology and science. We believethat augmenting our internal capabilities with external collaborations with experienced third parties can reduce development risk and accelerate our progress inthis field. OUR STRATEGY We believe that a key reason for the failure of many current cancer treatments is that they fail to kill CSCs, which we believe are responsible for the initiation,metastasis and recurrence of many cancers. Our goal is to build a leading biopharmaceutical company focused on the discovery, development and, ultimately,commercialization of novel drugs and companion diagnostics targeting CSCs. Key elements of our strategy to achieve this goal are: · Continue to screen and identify small molecules that target CSCs. We plan to use our proprietary EMT technology and high-throughput screeningmethods to identify additional compounds that target CSCs. We also plan to further optimize these agents through medicinal chemistry as necessary tocreate drug candidates. · In-license rights to additional compounds to expand our pipeline of candidates that target CSCs. We plan to pursue the acquisition or in-licensefrom third parties of rights to additional compounds that target CSCs, including compounds that are in preclinical and clinical development. We believethat our approach of identifying drug candidates from external sources at various stages of development to supplement our internal programs may allowus to initiate clinical development of a diverse pipeline of compounds more quickly than if we were to focus solely on internally developed NCEs. · Rapidly advance our drug candidates into clinical development. We expect to initiate clinical trials with VS-507 and one of either VS-4718 or VS-5095 over the next 12 to 15 months. Our goal is to initiate clinical development of a number of additional therapeutic candidates over the next severalyears. 12Table of Contents · Develop diagnostics for therapeutic products targeting CSCs. We plan to develop companion diagnostic products to support our therapeutic productcandidates. We believe that use of these diagnostics may aid in the selection of patients for enrollment in our clinical trials and, if we obtain marketingapproval, patients who are most likely to benefit from therapy with our drugs. We also believe that these diagnostics may be used to monitor patients’progress on therapy and aid physicians’ ongoing treatment decisions. · Collaborate selectively to augment and accelerate development and commercialization. We may seek third-party collaborators for the developmentand commercialization of our product candidates. In particular, we may enter into third-party arrangements for target oncology indications in which ourpotential collaborator has particular expertise or for which we need access to additional research, development or commercialization resources. · Maintain scientific leadership in the CSC field. We plan to continue to conduct research in the field of EMT and CSCs to further our understanding ofthe underlying biology of cancer progression and metastasis. We also plan to continue fostering relationships with top scientific advisors, researchers andphysicians. We believe that investing in the recruitment of exceptional advisors, employees and management is critical to leadership in the CSC field. OUR PRODUCT CANDIDATES Using our proprietary technology and high-throughput screening methods, we are evaluating compounds for their activity against CSCs in a way that webelieve has not been previously possible. We are focused on the discovery and development of small molecules to expedite the path to human clinical trials andto allow flexibility in the design of molecules for optimized efficacy and safety regardless of the route of administration. We intend to incorporate CSC-specific biomarkers into companion diagnostics for our product candidates for use in identifying patients whose tumors have ahigh percentage of CSCs and are likely to benefit from treatment. We may use this information to aid in the selection of patients for late stage clinical trials. Wealso plan to utilize these diagnostics to measure the effect that our product candidates have on CSCs in a tumor. We are developing our product candidates for the treatment of breast cancer, initially triple negative breast cancer, and other cancers with a high percentage ofCSCs. We believe that our product candidates target CSCs that have been implicated in aggressive cancers, metastasis and chemotherapeutic resistance. Toenhance therapeutic benefit, we may also use our product candidates in combination with existing therapies in an effort to target both CSCs and other types ofcancer cells. BREAST CANCER Overview The National Cancer Institute estimated that in January 2008 there were approximately 2.6 million women in the United States with a history of breast cancer.Breast cancer is currently the second most frequently diagnosed and the second most deadly cancer among women in the United States. The American CancerSociety estimates that in the United States in 2011, approximately 230,500 new cases of invasive breast cancer will be diagnosed in women and approximately39,500 women will die from the disease. Breast cancers can be segregated into subtypes based upon the positive presence of three protein receptors: · estrogen receptor, or ER; 13Table of Contents · progesterone receptor, or PR; and · human epidermal growth factor receptor 2, or HER2. Triple negative breast cancer, or TNBC, is a type of breast cancer that does not express any of these three receptors. According to results from a population-based study of the California Cancer Registry published by the American Cancer Society in 2007, approximately 15% of all breast cancers were classified asTNBC. In comparison with other breast cancers, TNBC tends to grow faster and has a higher rate of metastases. Furthermore, TNBC tends to recur moreoften than other subtypes of breast cancer. Patients with TNBC generally have a poorer prognosis and lower overall survival rate than patients with breastcancers that are positive for the hormone receptors ER and PR. We believe that the natural disease progression of TNBC exhibits the key hallmarks of CSCs. Specifically, we believe that: · TNBC is initially responsive to chemotherapy because chemotherapy kills the majority of cancer cells, but not the CSCs. · TNBC returns more often than other types of breast cancer in part because there are CSCs that are not killed by current cancer treatments. · The site of recurrence is often at another place in the body than the original tumor because the CSCs not killed are able to metastasize. · The recurring tumor may be resistant to therapy because it contains a high percentage of CSCs. We believe that our product candidates may be especially beneficial as therapeutics for the treatment of TNBC. We are currently evaluating specific molecularsub-types of TNBC that we believe are particularly enhanced in cancer stem cells as potential targets for our product candidates. For example, claudin-lowTNBC patients have tumors containing a low level of protein biomarkers called claudins. Claudin-low tumors are highly aggressive and are resistant totreatment. The prognosis for patients with claudin-low TNBC is poor. Current treatment of breast cancer Surgery, radiation therapy, targeted therapy, hormone therapy and combinations of conventional chemotherapy are often used to treat breast cancer. However,these therapies carry significant side effects and frequently do not result in a durable clinical response, especially for patients with TNBC. The choice of cancer drugs used to treat breast cancer is guided by clinical classification of the tumor as ER positive or negative, PR positive or negative andHER2 positive or negative. The presence, absence or combination of these biomarkers in patient tumors informs the selection of prescribed drugs, whichinclude the anti-estrogen therapies Tamoxifen and aromatase inhibitors, as well as agents that directly target HER2, such as Herceptin and Tykerb. Thesetreatments may slow or stop cancer growth and are currently considered the most successful treatments for breast cancer. However, because TNBC patientsare negative for ER, PR and HER2, the treatment options for these patients are limited. In particular, the targeted therapies, including Herceptin, Tykerb andanti-estrogen treatments, are not effective for these patients. Combinations of conventional chemotherapy work by stopping the function of cancer cells through a variety of mechanisms. Chemotherapies are usually nottargeted at any specific differences between cancer cells and 14Table of Contents normal cells. Rather, they kill cancer cells because cancer cells generally grow more rapidly than normal cells and, as a result, are relatively more affected bythe chemotherapy than normal cells. Because CSCs exhibit mechanisms of resistance, including a slower rate of growth than other cancer cells, they are oftennot susceptible to conventional chemotherapy. As a result, the treatments may succeed at initially decreasing tumor burden but ultimately fail to kill the CSCs.For example, in a study conducted at Baylor College of Medicine, in which biopsies were taken from breast cancer patients both before and after conventionalchemotherapy treatment, the percentage of CSCs increased over the 12-week treatment period, indicating the survival of these cells. If tumors recur, which happens more often in TNBC than other breast cancers, further therapy with conventional chemotherapy is generally palliative, notcurative, as the CSCs are able to metastasize and spread to other sites in the body. VS-507 Overview We are currently evaluating VS-507 in preclinical studies as a potential therapy for breast cancer. Our scientific co-founders identified VS-507 using theproprietary technology that we license from the Whitehead Institute and published the results in the peer reviewed scientific journal Cell in 2009. We hold anexclusive license from the Whitehead Institute for use of VS-507 in treating cancer. We expect to initiate a clinical trial with VS-507 over the next 12 to 15months. We believe VS-507 targets CSCs by disrupting signaling inside these cells. A group of scientific researchers recently reported in the Proceedings of theNational Academy of Sciences of the United States of America, or PNAS, that VS-507’s activity may be mediated through the blockade of the Wnt/beta-catenin cell signaling pathway. Numerous research reports, including a 2011 paper published in Cell by our scientific co-founder Robert Weinberg, describe acritical role of the Wnt/beta-catenin signaling pathway in the development and maintenance of CSCs. Wnts are a family of proteins that bind to receptor proteins, called Frizzled receptors, on the tumor cell surface. We believe that blocking Wnt function coulddramatically impair survival and growth of CSCs. However, Wnt signaling is extremely complex, involving 19 different Wnt proteins stimulating through 10different Frizzled receptors. While it may be possible to develop a small molecule or antibody that can block binding of one or perhaps a few Wnts to theirreceptors, such a drug likely would not effectively eliminate CSCs because other Wnt and Frizzled proteins that remain unblocked would be sufficient tomaintain CSC function. A potential breakthrough solution to this problem has come through the identification of the LRP6 protein, which interacts with multiple Wnt proteins andappears to be necessary for the development and maintenance of CSCs. LRP6 may represent a single common point of the Wnt system that can be targeted tokill CSCs. In the PNAS study referenced above, VS-507 decreased the levels of LRP6 protein in vitro and blocked the ability of Wnt proteins to stimulatebeta-catenin, a signaling protein that regulates genes responsible for CSC function. We believe this disruption of the Wnt/beta-catenin signaling pathway isresponsible for the inhibitory effects of VS-507 on CSCs that we have observed in preclinical studies. 15Table of Contents Preclinical development We are conducting a comprehensive preclinical program to study VS-507 as a potential treatment for breast cancer. Key results of this program to date, basedon experiments conducted by our scientific co-founders, are summarized below. Laboratory studies. The effect of VS-507 on CSCs as compared to other cancer cells was evaluated in vitro. We believe that a biomarker useful foridentifying breast CSCs is the expression ratio of the cell surface proteins CD44 to CD24, which can be measured for each individual cell using a methodknown as flow cytometry. Using this method, the amount of each protein is measured on the cell surface and the number of CSCs in a cell culture isdetermined by quantifying cell populations based on their expression of CD44 and CD24. As originally reported in PNAS in 2003, breast CSCs express highlevels of CD44 and low levels of CD24 relative to other types of breast cancer cells. This differential expression is represented in the figure below as an increasein the shading in the top left portion of the flow cytometry plot. Treatment of a breast cancer cell line containing CSCs with VS-507 resulted in a decrease inthe population of CSCs compared to the placebo control. In contrast, treatment with paclitaxel resulted in an increase in the population of CSCs compared tothe placebo control. We believe that the opposing actions of VS-507 and paclitaxel are due to a selective effect of VS-507 on the killing of CSCs not observedwith paclitaxel treatment. Gene expression analysis. Opposing effects of VS-507 and paclitaxel also were shown by gene expression analysis. Human breast cancer cells were treatedin culture with either VS-507 or paclitaxel for one week and then incubated in the absence of drug for three weeks prior to analysis. The two populations weresubjected to comparative global gene expression analysis, which can identify the genes that have the greatest differential change in expression in response totreatment. The panel of genes exhibiting the greatest differential change in this analysis comprise a gene expression signature that may be used for theidentification of CSCs. In this experiment, VS-507 and paclitaxel had opposing actions on biomarkers of CSCs and genes known to be commonly expressedin epithelial tissue types. Unlike treatment with paclitaxel, treatment with VS-507 resulted in the loss of expression of CSC-associated genes. Expression ofthese genes is correlated with poor-prognosis tumors. Mouse models of breast cancer. The functional presence of CSCs was assessed by evaluating in vivo tumor-initiating, or tumor-forming, ability afterchemical compound treatment. In these experiments, a human breast cancer cell line containing a mixture of CSCs and other cancer cells was treated with VS-507, paclitaxel or a placebo control in vitro for seven days and expanded in culture for at least 14 days in the absence of treatment. The cells were then injectedinto mice. As shown in the figure below, treatment of these cells with VS-507 resulted in the formation of tumors in fewer mice than treatment with paclitaxel.These findings suggest that CSCs within breast cancer cell populations may be resistant to paclitaxel but sensitive to treatment with VS-507. 16Table of Contents Mouse model of metastatic breast cancer. To specifically evaluate the effects of a therapeutic compound on the metastatic potential of cells followingtreatment, murine breast cancer cells treated in vitro with VS-507, paclitaxel or a placebo control were injected into the tail vein of mice and the number ofmetastases that subsequently appeared in the lungs was measured. After three weeks of growth of these cells in vivo, mice injected with cells that had beentreated with VS-507 displayed a four-fold reduction in metastatic burden compared to the placebo control while, in contrast, mice injected with cells that hadbeen treated with paclitaxel displayed a two-fold increase in metastatic burden compared to the placebo control. VS-507 clinical development plan Assuming successful completion of preclinical studies, we expect to initiate a clinical trial with VS-507 over the next 12 to 15 months. In a Phase 1 clinicaltrial, we anticipate enrolling patients with advanced solid tumors. The dose escalation portion of the Phase 1 clinical trial would be designed to determine themaximum tolerated dose of VS-507. We also plan to assess safety and tolerability of VS-507 in this portion of the trial. Upon identification of the maximum tolerated dose, we plan to enroll an expanded cohort of breast cancer patients to further assess the safety of VS-507 andevaluate efficacy on a preliminary basis in accordance with Response Criteria in Solid Tumors, or RECIST, measurement guidelines, and based on thepresence of CSC-specific biomarkers. RECIST has traditionally been used as a standard measure of activity in clinical trials. However, because RECIST isbased on gross changes in the size of tumor lesions of more than 30%, it is possible that changes in the tumor burden following selective targeting of CSCs in asingle-agent, maximum-tolerated-dose study will not be detected using RECIST. As a result, we believe that sensitive CSC-specific biomarkers may be usefulin conjunction with RECIST to quantify the effect of VS-507 on CSCs. VS-4718 / VS-5095 Overview We are currently evaluating VS-4718 and VS-5095 as potential therapies for cancers with a high percentage of CSCs. We identified the CSC-targeted activityof these compounds using our proprietary technology and hold worldwide exclusive rights to these compounds and their use. We expect to initiate a clinicaltrial with one of either VS-4718 or VS-5095 over the next 12 to 15 months. 17Table of Contents We believe VS-4718 and VS-5095 target CSCs through inhibition of FAK signaling. FAK expression is greater in many tumor types compared to normaltissue, particularly in cancers that have a high invasive and metastatic capability. The contact between epithelial cancer cells and connective tissue stimulatesFAK signaling. However, epithelial cancer cells that undergo EMT acquire the ability to survive in the absence of contact with connective tissue. We believethat FAK signaling in CSCs may be maintained through alternative mechanisms, thus providing CSCs the ability to survive in the absence of cell contact.Accordingly, we believe that FAK signaling may be a central component of CSC biology that allows CSCs to survive after exiting from a tumor mass andenable metastasis to other sites in the body. In 2009, our scientific co-founder Robert Weinberg reported in PNAS that in a mouse model of breast cancer FAK signaling was required to enable lungmetastasis. Epithelial cells, which lack the ability to increase their FAK signaling activity through alternative mechanisms, remained non-metastatic in thismodel and did not survive dissemination to the lungs. In addition, researchers at McGill University reported in PNAS that in a genetically modified mousemodel the specific deletion of FAK from the mammary cells prevented primary tumor formation and metastasis. Scientific research suggests that increased FAK expression and activity is associated with metastatic progression and poor prognosis in multiple cancer types.For example, a 2009 retrospective study published in the Journal of Clinical Investigation identified the amplification, or increase in number, of the geneencoding FAK in a large percentage of breast cancers. This gene amplification, and resulting high FAK expression, significantly correlated with theprogression of early stage, primary breast cancer to advanced metastatic disease. In an analysis of 295 breast cancer patients that was part of this study,elevated FAK expression was a marker of poor survival. The correlation of elevated FAK expression with poor survival was more significant than andindependent of other commonly used clinical parameters, such as hormone receptor status. We believe targeted disruption of the FAK signaling pathway withVS-4718 or VS-5095 may reduce both the primary tumor burden and the ability of CSCs to form metastases. Preclinical development We are conducting a preclinical program to study VS-4718 and VS-5095 as potential treatments for breast and other cancers associated with increased FAKactivity. Key results to date from preclinical studies of VS-4718 performed by our licensor are summarized below. Comparable studies conducted to date ofVS-5095 generally have provided similar overall results as the VS-4718 results. Biochemical and cellular tests. In biochemical testing, VS-4718 inhibited purified FAK and demonstrated in vitro selectivity against a panel of 107 differentprotein kinases. In addition, in various in vitro assessments of cell proliferation using our EMT technology, VS-4718 exhibited potent activity and up to a 25-fold preferential effect, or selectivity, for CSCs as compared to other types of cancer cells. Pharmacokinetics and tolerability in mice. VS-4718 was well tolerated in mice after both acute and chronic dosing. VS-4718 also exhibited acceptablepharmacokinetics in mice. Pharmacokinetics is the process by which a drug is absorbed, distributed and metabolized in the body. In mouse models assessingpharmacodynamics, a single dose of VS-4718 inhibited FAK activity in tumors over a 12-hour period. Pharmacodynamics refers to the biochemical andphysiological effect of a drug on the body. Mouse models of breast cancer. VS-4718 has exhibited tumor growth inhibition and reduction of metastatic burden in several mouse models of breastcancer. In one experiment, VS-4718 was tested in a model in which TNBC cells were implanted into a mouse and the tumor was allowed to develop. Upontumor formation, the 18Table of Contents mice were treated with VS-4718 in drinking water at a concentration of 0.5 mg/ml or a placebo control beginning at day 12 through the end of the experiment.As shown in the figure below, the tumor volume in the VS-4718 treatment group was significantly smaller than in the placebo group from day 27 through theend of the experiment. In addition, at day 70 the weight of the primary tumor and the number of lung metastases in the VS-4718 treatment group were bothsignificantly less than in the placebo group.  The vertical line on each data point in the tumor volume figure above represents the standard deviation from the mean. The box and vertical line for each datapoint in the tumor weight and metastases figures above show the distribution of the data. The square data point inside the box represents the mean. The bottomof the box represents the 25th percentile, the middle line in the box represents the median and the top of the box represents the 75th percentile. The vertical linesprojecting from the bottom and top of the box represent the 5th and 95th percentiles. VS-4718 / VS-5095 development plan We are progressing both VS-4718 and VS-5095 through additional preclinical efficacy and toxicology studies. It is our intention to select only one of thesecompounds for clinical development. Upon selection of the lead candidate and assuming successful completion of preclinical studies, we expect to initiateclinical trials with one of either VS-4718 or VS-5095 over the next 12 to 15 months. In a Phase 1 clinical trial, we anticipate enrolling patients with advancedsolid tumors. The dose escalation portion of the Phase 1 clinical trial would be designed to determine the maximum tolerated dose. We also plan to assess safetyand tolerability in this portion of the trial. Upon identification of the maximum tolerated dose, we plan to enroll an expanded cohort of patients with breast and other cancers associated with increasedFAK activity to further assess the safety of the product candidate and evaluate efficacy on a preliminary basis in accordance with RECIST measurementguidelines, and based on the presence of CSC-specific biomarkers. As with VS-507, it is possible that changes in the tumor burden following selectivetargeting of CSCs in a single-agent, maximum-tolerated-dose study will not be detected 19Table of Contents using RECIST. As a result, we believe that sensitive CSC-specific biomarkers may be useful in conjunction with RECIST to quantify the effect on CSCsfollowing treatment. NEW CHEMICAL ENTITIES (NCEs) We have initiated NCE programs on more than 10 series of chemical compounds identified using our proprietary EMT technology along with high-throughputscreening methods. In addition, we have synthesized several drug candidates that are chemically similar to VS-507 and are currently optimizing their activityto block Wnt/beta-catenin signaling and induce selective killing of CSCs. We evaluate the activity of chemical compounds in vitro by measuring their potency and selectivity against CSCs. In general, the more potent a drug is, thelower the dose required for a therapeutic effect. In an in vitro assessment of cell proliferation, one of the series of NCE compounds that we have identified hasexhibited potent activity and greater than 10-fold selectivity for CSCs as compared to other types of cancer cells. A second series of compounds has shownpotent activity and greater than 50-fold selectivity for killing of CSCs compared to its effects on other types of cancer cells. Compounds from our NCEprograms also have demonstrated preclinical activity in a broad range of cancer cells, including breast cancer cell lines derived from TNBC tumors in whicha high percentage of CSCs have been identified. We are currently evaluating additional proprietary product candidates from our NCE programs in preclinicalstudies for their use in breast and other cancers. INTELLECTUAL PROPERTY We aggressively strive to protect the proprietary technology that we believe is important to our business, including seeking and maintaining patents intended tocover our products and compositions, their methods of use and processes for their manufacture, as well as our diagnostic, biomarker, patient selection anddrug discovery technologies and any other inventions that are commercially important to the development of our business. We also rely on trade secrets toprotect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. Our success will depend on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions andknow-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid andenforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities todevelop and maintain our proprietary position. We seek to obtain domestic and international patent protection, and endeavor to promptly file patentapplications for new commercially valuable inventions. We license a portfolio of patent applications owned by the Whitehead Institute, Harvard and MIT. As of March 15, 2012, we hold exclusive licenses from theWhitehead Institute to three pending U.S. patent applications and one issued U.S. patent, as well as foreign counterparts to these patent applications, and oneapplication under a Patent Cooperation Treaty, or PCT application. One family of applications licensed from the Whitehead Institute under our drug discovery platform license agreement includes claims covering: methods ofidentifying compounds that inhibit the growth or survival of CSCs, methods of identifying CSCs and methods of treating cancer, including methods ofselecting courses of treatment for cancer therapy based, for example, on the presence of a biomarker. The application also includes claims to methods of usingcertain compounds, identified for example by the claimed screening technology, in 20Table of Contents the treatment of cancer. Any U.S. or EU patents that may issue from this application would have a statutory expiration date in 2029. We also license two families of patent applications from the Whitehead Institute under our cancer diagnostic license agreement that include claims covering:additional methods of identifying CSCs, in vitro methods of creating CSCs, for example through activation of the EMT process, progenitor cells and uses forthose cells, methods of determining the metastatic potential of a tumor and methods of diagnosing, preventing and treating cancer metastasis. Any U.S. patentsthat may issue from these applications would have a statutory expiration date in 2025 or 2026. One U.S. patent under this agreement has issued, whichincludes claims covering certain methods of predicting the likelihood that a tumor will metastasize. Although the statutory expiration date for this patent is inMarch 2025, the patent is entitled to an additional term under U.S. patent adjustment provisions that expires in December 2028. We also license from the Whitehead Institute under our cancer diagnostic license agreement a PCT application that includes claims covering compositions,such as cell cultures, that include compounds that can induce epithelial cells to undergo an EMT process, methods of inducing epithelial cells to undergo anEMT process and methods of preparing progenitor cells from epithelial cells. Any U.S. patents that may issue from U.S. national stage applications claimingpriority from this PCT application would have a statutory expiration date in 2031. We have an agreement with the Broad Institute, which grants us under certain circumstances the first right to negotiate a license for intellectual property. Thisintellectual property includes patent applications and patents covering the use of biomarkers related to the EMT process. This intellectual property alsoincludes compounds that can be used for treatment of cancer. An example is a compound that is identified by screening the effects of compounds on CSCs,notably CSCs created through the EMT process. We exercised this right in February 2012 and entered into a license agreement with the Broad Institute for onepatent application. We also exclusively license a portfolio of patent applications relating to FAK inhibitors from Poniard Pharmaceuticals, Inc., or Poniard. As of March 15,2012, we hold licenses from Poniard to four patent applications, as well as foreign counterparts to these patent applications. One of these patent applications isowned by The Scripps Research Institute, or Scripps, and licensed to Poniard and the other three are owned by Poniard. The patent application owned byScripps includes claims covering the composition of matter of compounds, which, for example, can inhibit FAK, and methods of using these compounds totreat disorders such as cancer. Any U.S. or EU patents that may issue from this application would have a statutory expiration date in 2028. The patentapplications owned by Poniard include claims covering oral formulations of kinase inhibitors, such as FAK inhibitors, and methods of use thereof, methodsof synthesis of certain compounds, for example, certain FAK inhibitors, and methods of use thereof, and methods of using a compound to promote apoptosisin tumor cells. Any U.S. or EU patents that may issue from these applications would have a statutory expiration date in 2030 or 2031. We have filed and own one patent application directed to formulations of VS-507 and one patent application directed to analogues of VS-507. Any U.S. or EUpatents that may issue from these applications would have a statutory expiration date in 2032 or 2033. We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to protect ourproprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and contractors. We alsoseek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronicsecurity of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measuresmay be breached, and we may not have 21Table of Contents adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extentthat our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related orresulting know-how and inventions. LICENSES Whitehead Institute for Biomedical Research Drug discovery platform license agreement In October 2010, we entered into an exclusive license agreement with the Whitehead Institute, or the drug discovery platform license agreement, which weamended and restated in January 2012, both on its own behalf and as sole and exclusive agent of Harvard and MIT. Under the drug discovery platformlicense agreement, we acquired an exclusive, royalty-bearing, worldwide license under patent rights owned by the Whitehead Institute, Harvard and MIT todevelop, make, use and sell products covered by the licensed patent rights, including VS-507 for use in treating cancer, and to develop and perform licensedprocesses, in each case, for all human therapeutic, prognostic and diagnostic uses. These exclusive licensed patent rights are described in more detail aboveunder “Intellectual Property.” We are required to use commercially reasonable efforts to develop and commercialize licensed products under the agreement. In particular, we are required tofulfill specific development and regulatory milestones by particular dates and, during each calendar year, either spend a specified amount for research anddevelopment, actively conduct one or more clinical trials for a licensed product or a product identified using a licensed process that does not constitute alicensed product, which we refer to as an identified product, prepare, file or pursue a filed application for regulatory approval of a licensed product or anidentified product, or launch or sell a licensed product or identified product. Under the agreement, we paid the Whitehead Institute an upfront license fee and reimbursed patent related fees and costs incurred by the Whitehead Institute,Harvard and MIT totaling $104,000 in the aggregate and issued 166,664 shares of our common stock to the Whitehead Institute and entities and individualsaffiliated with the Whitehead Institute. We also agreed to pay the Whitehead Institute annual license maintenance fees, milestone payments, royalties as a percentage of net sales and a percentage ofsublicense income that we receive. Annual license maintenance fees are creditable against royalties, which are described below, earned during the same calendaryear. Milestone payments are triggered upon the achievement of specified development, regulatory and commercialization milestones and are not creditableagainst the royalties described below. For each licensed product, we agreed to make milestone payments of up to an aggregate of $1,560,000 plus an additionalamount for each subsequent approval of additional indications for a maximum number of licensed products. For each identified product that is not a licensedproduct, we agreed to make milestone payments of up to an aggregate of $815,000 plus an additional amount for each subsequent approval of additionalindications for a maximum number of identified products. Each type of specified milestone payment is payable only for each of the maximum number oflicensed products and the maximum number of identified products, as the case may be, to achieve the applicable milestone. In addition, a separate milestonepayment is due upon the first commercial sale of each licensed product or identified product that is a diagnostic or prognostic test. A single additionalmilestone payment is due for the first issuance of licensed patent rights in the United States, the United Kingdom, France, Germany, Spain or Italy. Theroyalty rate is in the low single digits as a percentage of net 22Table of Contents sales for licensed products that are therapeutics, the mid single digits for licensed products that are diagnostics or prognostics and less than one percent foridentified products. The Whitehead Institute, Harvard and MIT retain the right to, and may grant licenses to other academic and non-profit institutions for the right to, practice thelicensed patent rights for research, teaching and educational purposes. The Whitehead Institute, Harvard, MIT or any such other institution could seek tolicense to third parties any intellectual property rights that it discovers using the licensed patent rights while pursuing these purposes. Under the agreement, wehave a right, subject to the Whitehead Institute’s obligations under third party research funding agreements, to negotiate a license for any compounds identifiedprior to a specified date in the Whitehead Institute’s laboratory run by Dr. Weinberg that selectively target CSCs generated by induction through the EMTprocess. After a specified period of time, if a third party requests to sublicense the patent rights for a product or process that is not directly competitive with ourproducts or processes, we must enter into good-faith negotiations to grant a sublicense for such proposed product or process. If we do not grant a sublicensewithin a specified period of time after receiving a written request, the Whitehead Institute may grant a license to the third party and our rights in the field of useof such sublicense will terminate. Additionally, after a specified period of time, if we are not actively conducting high-throughput screening using the licensedpatent rights to identify product candidates, then, except for any rights directed to uses that we are actively developing, the Whitehead Institute may convertour license to the licensed patent rights from exclusive to non-exclusive. We have the right to terminate the agreement for any reason upon at least 90 days’ prior written notice. The Whitehead Institute has the right to terminate theagreement if we and all of our sublicensees cease to carry on business related to the agreement for a specified period of time, we fail to pay any amounts dueand payable under the agreement to the Whitehead Institute, subject to a grace period, we materially breach the agreement and fail to cure such breach within aspecified grace period or we or a sublicensee challenge the licensed patent rights in a legal or administrative proceeding. The agreement otherwise terminatesupon the expiration or abandonment of all licensed patents and patent applications. Cancer diagnostic license agreement In October 2010, we entered into a separate license agreement with the Whitehead Institute, or the cancer diagnostic license agreement, under which we acquireda non-exclusive, worldwide license to patent rights owned by the Whitehead Institute for research purposes. In December 2011, we amended and restated thisagreement with the Whitehead Institute. Under the amended and restated cancer diagnostic license agreement, we acquired an exclusive, royalty-bearing,worldwide license under these patent rights to develop, make, use and sell products covered by the licensed patent rights and to develop and perform servicesusing a licensed product or the practice of the licensed patent rights for or on behalf of a third party, in each case, for cancer diagnostics and companionclinical uses. These licensed patent rights are described in more detail above under “Intellectual Property.” Under the agreement, we paid the Whitehead Institute upfront license fees and expect to reimburse patent related fees and costs incurred by the WhiteheadInstitute totaling $70,000 in the aggregate. We also agreed to pay the Whitehead Institute annual license maintenance fees, milestone payments, royalties as apercentage of net sales and a percentage of sublicense income that we receive. Annual license maintenance fees are creditable against royalties, which aredescribed below, earned during the same calendar year. Milestone payments of up to an aggregate of $825,000 are triggered upon the achievement of specifiedregulatory and commercialization 23Table of Contents milestones and are not creditable against the royalties described below. The royalty rate is in the mid single digits as a percentage of net sales. If we are required to pay royalties to a third party in consideration of a license or similar right in order to make, use or sell a licensed product or licensedservice, then we may deduct up to 50% of the amounts paid to such third party, subject to specified limitations, from the payments that we owe to theWhitehead Institute for such licensed product or licensed service. We are required to use commercially reasonable efforts to develop and commercialize licensed products or licensed services under the agreement. In particular,we are required to fulfill specific development, regulatory and commercialization milestones by particular dates and to commit a specified number of full timestaff equivalents toward the development of a licensed product or licensed service until the first commercial sale of a licensed product or performance of alicensed service. The Whitehead Institute retains the right to, and may grant licenses to other academic and non-profit institutions for the right to, practice the licensed patentrights for research, teaching and educational purposes. The Whitehead Institute or any such other institution could seek to license to third parties anyintellectual property rights that it discovers using the licensed patent rights while pursuing these purposes. After a specified period of time, if a third party requests to sublicense the patent rights for a product or service that is not directly competitive with ourproducts or services, we must enter into good-faith negotiations to grant a sublicense for such proposed product or service. If we do not grant such a sublicensewithin a specified period of time after receiving a written request, the Whitehead Institute may grant a license to the third party and our rights in the field of useof such sublicense will terminate. Additionally, after a specified period of time, if the market is not being reasonably served by us, as determined by theWhitehead Institute, and a third party requests to sublicense the patent rights for a product or service that is directly competitive with our products or services,we must enter into good-faith negotiations to grant a sublicense for such proposed product or service. If we do not grant such a sublicense within a specifiedperiod of time after receiving a written request, we and the Whitehead Institute have agreed to mutually select a qualified independent third party to setcommercially reasonable terms and conditions consistent with similar technology in the industry under which we would sublicense our rights for suchproposed product or service to the third party. Additionally, after a specified period of time, if we are not actively conducting efforts to validate, use orcommercialize a license product or licensed service, then the Whitehead Institute may convert our license to the licensed patent rights from exclusive tononexclusive. We have the right to terminate the agreement for any reason upon at least 90 days’ prior written notice. The Whitehead Institute has the right to terminate theagreement if we and all of our sublicensees cease to carry on business related to the agreement for a specified period of time, we fail to pay any amounts dueand payable under the agreement to the Whitehead Institute, subject to a grace period, we materially breach the agreement and fail to cure such breach within aspecified grace period or we or a sublicensee challenge the licensed patent rights in a legal or administrative proceeding. The agreement otherwise terminatesupon the expiration or abandonment of all licensed patents and patent applications. Broad Institute of MIT and Harvard University In October 2010, the Broad Institute granted to us the first right to negotiate a license in good faith for specified intellectual property owned by the BroadInstitute if we have not breached the terms of the drug discovery platform license agreement described above. Following written notice of the availability of suchintellectual 24Table of Contents property for licensing by the Broad Institute to us, the Broad Institute has agreed not to negotiate with any other party during our right of first negotiationperiod. If we and the Broad Institute are unable to negotiate a license within such period, the Broad Institute may then offer the intellectual property forlicensing to other parties. The intellectual property subject to this right of first negotiation is described in more detail above under “Intellectual Property.” In February 2012, we entered into an exclusive patent license agreement with the Broad Institute for a patent application covering therapeutic uses of cancerstem cell technology that the Broad Institute offered to us and, in the future, we may enter into one or more additional license agreements with the BroadInstitute for cancer stem cell intellectual property if the Broad Institute offers additional licensing opportunities to us pursuant to this right of first negotiationagreement. Poniard Pharmaceuticals, Inc. In November 2011, we entered into a license agreement with Poniard under which we acquired an exclusive, worldwide license under patent rights and know-how owned or controlled by Poniard to develop, make, use and sell compounds and products covered by the licensed patent rights for the diagnosis,treatment, prevention or control of all human diseases and conditions. The licensed compounds include VS-4718 and VS-5095 and any other compoundscovered by a licensed patent right under the agreement that have the inhibition of FAK as a primary mode of action. These licensed patent rights are describedin more detail above under “Intellectual Property” and include patent rights owned by Scripps and licensed to Poniard. In accordance with the agreementbetween Poniard and Scripps, Scripps retains the right to grant non-exclusive licenses, without the right to sublicense, to nonprofit or academic institutions touse for any noncommercial research or education purposes any licensed patent rights owned by Scripps and licensed to Poniard. Under the agreement, we paid Poniard an upfront license fee and agreed to pay Poniard milestone payments of up to an aggregate of $13,250,000 upon theachievement of specified development and regulatory milestones. We also agreed to issue to Poniard a warrant to purchase 142,857 shares of our commonstock upon the first dosing of the first patient in our first Phase 1 clinical trial of a licensed product. The exercise price of such warrant would be equal to theaverage closing price of our common stock during the five trading days preceding such issue date. In addition, we agreed to pay low to mid single digitroyalties to Poniard as a percentage of net sales of licensed products. Our obligation to pay royalties continues on a country by country basis until theexpiration of all licensed patent rights covering licensed products in such country. If the royalty term under our agreement with Poniard expires with respect to alicensed product in a country and Poniard continues to have royalty payment obligations under its agreement with Scripps with respect to our net sales oflicensed products in such country, we agreed to pay Poniard the royalty amount due to Scripps with respect to net sales of such licensed product in suchcountry. Poniard is responsible for all amounts payable to any third party under any agreement to which Poniard was a party as of the date of our agreement that areapplicable to rights licensed to us, including amounts payable to Scripps with respect to the patent rights owned by Scripps and licensed to Poniard. If welicense or acquire technology from a third party in order to develop or commercialize a licensed product and are required to pay such third party license fees,milestone payments, royalties or other amounts, then we may deduct up to 50% of the amount paid to such third party from the payments that we owe toPoniard for such licensed product. This deduction is subject to specified limitations, including that in no event will any such deduction reduce a payment thatwe owe to Poniard to less than 50% of the otherwise applicable amount. We are required to use commercially reasonable efforts to develop and, subject to regulatory approval, commercialize licensed products in the United States,the United Kingdom, France, Germany and Japan. We have the right to terminate the agreement or any portion of our licensed rights under the agreement upon at least 90 days’ prior written notice. We andPoniard each have the right to terminate the agreement if the other party materially breaches the agreement and fails to cure such breach within a specified graceperiod, subject to 25Table of Contents the right of either party to submit a dispute to arbitration. The agreement otherwise terminates upon the last to expire licensed patent right covering a licensedproduct. COMPETITION The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis onproprietary products. While we believe that our technology, development experience and scientific knowledge provide us with competitive advantages, we facepotential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academicinstitutions and governmental agencies and public and private research institutions. Any product candidates that we successfully develop and commercializewill compete with existing therapies and new therapies that may become available in the future. There are other companies working to develop therapies that target CSCs. These companies include divisions of large pharmaceutical companies includingAstellas Pharma Inc., Sanofi-Aventis U.S. LLC, GlaxoSmithKline plc, Boehringer Ingelheim GmbH, Pfizer Inc. and others. There are also biotechnologycompanies of various sizes that are developing therapies against CSCs, including OncoMed Pharmaceuticals, Inc., Boston Biomedical Inc. and StemlineTherapeutics, Inc. Many of our competitors may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing,conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical,biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. These competitorsalso compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration forclinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to besignificant competitors, particularly through collaborative arrangements with large and established companies. The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience, price, theeffectiveness of companion diagnostics in guiding the use of related therapeutics, the level of generic competition and the availability of reimbursement fromgovernment and other third-party payors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer orless severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or otherregulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong marketposition before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payorsseeking to encourage the use of generic products. There are many generic products currently on the market for the indications that we are pursuing, andadditional products are expected to become available on a generic basis over the coming years. If our therapeutic product candidates are approved, we expectthat they will be priced at a significant premium over competitive generic products. The most common methods of treating patients with cancer are surgery, radiation and drug therapy, including chemotherapy, hormone therapy and targeteddrug therapy. There are a variety of available drug therapies marketed for cancer. In many cases, these drugs are administered in combination to enhanceefficacy. While our 26Table of Contents product candidates may compete with many existing drug and other therapies, to the extent they are ultimately used in combination with or as an adjunct tothese therapies, our product candidates will not be competitive with them. Some of the currently approved drug therapies are branded and subject to patentprotection, and others are available on a generic basis. Many of these approved drugs are well established therapies and are widely accepted by physicians,patients and third-party payors. In general, although there has been considerable progress over the past few decades in the treatment of cancer and the currentlymarketed therapies provide benefits to many patients, these therapies all are limited to some extent in their efficacy and frequency of adverse events, and noneof them are successful in treating all patients. As a result, the level of morbidity and mortality from cancer remains high. In addition to currently marketed therapies, there are also a number of products in late stage clinical development to treat cancer. These products indevelopment may provide efficacy, safety, convenience and other benefits that are not provided by currently marketed therapies. As a result, they may providesignificant competition for any of our product candidates for which we obtain market approval. MANUFACTURING We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently rely, and expect to continue to rely, on thirdparties for the manufacture of our product candidates and any products that we may develop, other than small amounts of compounds that we may synthesizeourselves for preclinical testing. To date, we have obtained starting materials for our supply of the bulk drug substance for our product candidates from onethird-party manufacturer. We obtain our supplies from this manufacturer on a purchase order basis and do not have a long-term supply arrangement in place.We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance. If our current third-party manufacturershould become unavailable to us for any reason, we believe that there are several potential replacements, although we might incur some delay in identifying andqualifying such replacements. All of our drug candidates are organic compounds of low molecular weight, generally called small molecules. We select compounds not only on the basis oftheir potential efficacy and safety, but also for their ease of synthesis and reasonable cost of their starting materials. We expect to continue to develop drugcandidates that can be produced cost-effectively at third-party manufacturing facilities. GOVERNMENT REGULATION Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research,development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution,marketing, post-approval monitoring and reporting, import and export of pharmaceutical products, such as those we are developing. United States drug approval process In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, the Public Health Service Act and implementingregulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes andregulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable United States requirements at any timeduring the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions,such as the FDA’s refusal to approve 27Table of Contents pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, total or partialsuspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement of profits or civil or criminal penalties. The process required by the FDA before a drug may be marketed in the United States generally involves the following: · completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP,regulations; · submission to the FDA of an IND, which must become effective before human clinical trials may begin; · approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; · performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish the safety and efficacyof the proposed drug for each indication; · submission to the FDA of a new drug application, or NDA; · satisfactory completion of an FDA advisory committee review, if applicable; · satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance withcurrent good manufacturing practices, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’sidentity, strength, quality and purity; and · FDA review and approval of the NDA. Preclinical studies Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal studies to assess the potential foradverse events and in some cases to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations andrequirements, including GLP regulations for safety/toxicology studies. An IND sponsor must submit the results of the preclinical tests, together withmanufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things, to the FDA as part ofan IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or moreproposed clinical trials and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before theclinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence. Clinical trials Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance withGCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before theirparticipation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the 28Table of Contents objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and anysubsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trialmust review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review. The IRB mustreview and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate incompliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health forpublic dissemination on their ClinicalTrials.gov website. Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined: · Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosagetolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness. · Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate theefficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. · Phase 3: The drug is administered to an expanded patient population in adequate and well-controlled clinical trials to generate sufficient data tostatistically confirm the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product and to provide adequateinformation for the labeling of the product. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur.Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsormay suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptablehealth risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordancewith the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Marketing approval Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed information relating tothe product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approvalto market the product for one or more indications. Under federal law, the submission of most NDAs is additionally subject to a substantial application userfee, currently exceeding $1.8 million, and the sponsor of an approved NDA is also subject to annual product and establishment user fees, currently exceeding$98,000 per product and $520,000 per establishment. These fees are typically increased annually. The FDA conducts a preliminary review of all NDAs within the first 60 days after submission before accepting them for filing to determine whether they aresufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, theapplication must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing.Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the review ofNDAs. Under these goals, the 29Table of Contents FDA has committed to review most such applications for non-priority products within 10 months, and most applications for priority review products, that is,drugs that the FDA determines represent a significant improvement over existing therapy, within six months. These performance goals likely will be extendedby several months when the Prescription Drug User Fee Act is reauthorized in 2012. The review process may be extended by the FDA for three additionalmonths to consider certain information or clarification regarding information already provided in the submission. The FDA may also refer applications fornovel drugs or products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and otherexperts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of anadvisory committee, but it considers such recommendations carefully when making decisions. Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve anapplication unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistentproduction of the product within required specifications. In addition, before approving an NDA, the FDA will typically inspect one or more clinical sites toassure compliance with GCP and integrity of the clinical data submitted. The testing and approval process requires substantial time, effort and financial resources, and each may take many years to complete. Data obtained fromclinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. TheFDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to develop our product candidatesand secure necessary governmental approvals, which could delay or preclude us from marketing our products. After the FDA’s evaluation of the NDA and inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. Anapproval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A complete response letter generallyoutlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. Ifand when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA hascommitted to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additionalinformation, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval and refuse to approve the NDA. Even if the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions beincluded in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety afterapproval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distributionrestrictions or other risk management mechanisms, which can materially affect the potential market and profitability of the product. The FDA may prevent orlimit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, some types of changes to theapproved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements andFDA review and approval. Fast track designation The FDA is required to facilitate the development and expedite the review of drugs that are intended for the treatment of a serious or life-threatening conditionfor which there is no effective treatment and which 30Table of Contents demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug candidate may request theFDA to designate the product for a specific indication as a fast track product concurrent with or after the filing of the IND for the product candidate. The FDAmust determine if the product candidate qualifies for fast track designation within 60 days after receipt of the sponsor’s request. In addition to other benefits, such as the ability to use surrogate endpoints and have greater interactions with the FDA, the FDA may initiate review of sectionsof a fast track product’s NDA before the application is complete. This rolling review is available if the applicant provides and the FDA approves a schedulefor the submission of the remaining information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing a fast trackapplication does not begin until the last section of the NDA is submitted. In addition, the fast track designation may be withdrawn by the FDA if the FDAbelieves that the designation is no longer supported by data emerging in the clinical trial process. Priority review Under FDA policies, a product candidate may be eligible for priority review, or review within a six-month time frame from the time a complete application isreceived. Products regulated by the FDA’s Center for Drug Evaluation and Research, or CDER, are eligible for priority review if they provide a significantimprovement compared to marketed products in the treatment, diagnosis or prevention of a disease. A fast track designated product candidate would ordinarilymeet the FDA’s criteria for priority review. Accelerated approval Under the FDA’s accelerated approval regulations, the FDA may approve a drug for a serious or life-threatening illness that provides meaningful therapeuticbenefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit. In clinical trials, a surrogateendpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions orsurvives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A product candidate approved on this basis issubject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on theclinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA towithdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject toprior review by the FDA. Orphan drugs Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally defined as adisease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA.After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drugdesignation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receive FDAapproval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing periodin the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to marketthe same drug for the same orphan indication, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drugexclusivity in that it is shown to be safer, more effective or makes a major contribution to patient 31Table of Contents care. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a differentdisease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee. Pediatric information Under the Pediatric Research Equity Act of 2003, as amended and reauthorized by the Food and Drug Administration Amendments Act of 2007, or theFDAAA, an NDA or supplement to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indicationsin all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective.The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of theproduct for use in adults, or full or partial waivers from the pediatric data requirements. Unless otherwise required by regulation, the pediatric datarequirements do not apply to products with orphan drug designation. The Hatch-Waxman act Abbreviated new drug applications In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’s product or amethod of using the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved DrugProducts with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited bypotential competitors in support of approval of an abbreviated new drug application, or ANDA. Generally, an ANDA provides for marketing of a drugproduct that has the same active ingredients in the same strengths, dosage form and route of administration as the listed drug and has been shown to bebioequivalent through in vitro or in vivo testing or otherwise to the listed drug. ANDA applicants are not required to conduct or submit results of preclinical orclinical tests to prove the safety or effectiveness of their drug product, other than the requirement for bioequivalence testing. Drugs approved in this way arecommonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listeddrug. The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book, except for patentscovering methods of use for which the ANDA applicant is not seeking approval. Specifically, the applicant must certify with respect to each patent that: · the required patent information has not been filed; · the listed patent has expired; · the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or · the listed patent is invalid, unenforceable or will not be infringed by the new product.·the listed patent is invalid, unenforceable or will not be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called aParagraph IV certification. If the applicant does not challenge the listed patents or indicate that it is not seeking approval of a patented method of use, theANDA application will not be approved until all the listed patents claiming the referenced product have expired. 32Table of Contents If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDAand patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit inresponse to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IVcertification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or adecision in the infringement case that is favorable to the ANDA applicant. The ANDA also will not be approved until any applicable non-patent exclusivity period, such as exclusivity for obtaining approval of a new chemical entity,for the referenced product has expired. Federal law provides a period of five years following approval of a drug containing no previously approved activemoiety during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains a Paragraph IV challenge to a listedpatent, in which case the submission may be made four years following the original product approval. Federal law provides for a period of three years ofexclusivity during which the FDA cannot grant effective approval of an ANDA if a listed drug contains a previously approved active moiety, but FDArequires as a condition of approval new clinical trials conducted by or for the sponsor. This three-year exclusivity period often protects changes to a previouslyapproved drug product, such as a new dosage form, route of administration, combination or indication. Under the Best Pharmaceuticals for Children Act,federal law also provides that periods of patent and non-patent marketing exclusivity listed in the Orange Book for a drug may be extended by six months ifthe NDA sponsor conducts pediatric studies identified by the FDA in a written request. For written requests issued by the FDA after September 27, 2007, thedate of enactment of the FDAAA, the FDA must grant pediatric exclusivity no later than nine months prior to the date of expiration of patent or non-patentexclusivity in order for the six-month pediatric extension to apply to that exclusivity period. Section 505(b)(2) new drug applications Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonly referred to asa Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s previous approval of a similar product, or published literature, insupport of its application. 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products.Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for theapplicant and for which the applicant has not obtained a right of reference. If the 505(b)(2) applicant can establish that reliance on the FDA’s previousapproval is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also requirecompanies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new productcandidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by theSection 505(b)(2) applicant. To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to theFDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As a result, approval of a505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity forobtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certificationand subsequent patent 33Table of Contents infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to theSection 505(b)(2) applicant. Combination products The FDA regulates combinations of products that cross FDA centers, such as drug, biologic or medical device components that are physically, chemically orotherwise combined into a single entity, as a combination product. The FDA center with primary jurisdiction for the combination product will take the lead inthe premarket review of the product, with the other center consulting or collaborating with the lead center. The FDA’s Office of Combination Products, or OCP, determines which center will have primary jurisdiction for the combination product based on thecombination product’s “primary mode of action.” A mode of action is the means by which a product achieves an intended therapeutic effect or action. Theprimary mode of action is the mode of action that provides the most important therapeutic action of the combination product, or the mode of action expected tomake the greatest contribution to the overall intended therapeutic effects of the combination product. Often it is difficult for the OCP to determine with reasonable certainty the most important therapeutic action of the combination product. In those difficultcases, the OCP will consider consistency with other combination products raising similar types of safety and effectiveness questions, or which center has themost expertise to evaluate the most significant safety and effectiveness questions raised by the combination product. A sponsor may use a voluntary formal process, known as a Request for Designation, when the product classification is unclear or in dispute, to obtain abinding decision as to which center will regulate the combination product. If the sponsor objects to that decision, it may request that the agency reconsider thatdecision. Overview of FDA regulation of companion diagnostics We are developing in vitro and in vivo companion diagnostics for use in selecting the patients that we believe will respond to our cancer therapeutics. FDA officials have issued draft guidance that, when finalized, would address issues critical to developing in vitro companion diagnostics, such as biomarkerqualification, establishing clinical validity, the use of retrospective data, the appropriate patient population and when the FDA will require that the device andthe drug be approved simultaneously. The draft guidance issued in July 2011 states that if safe and effective use of a therapeutic product depends on an invitro diagnostic, then the FDA generally will require approval or clearance of the diagnostic at the same time that the FDA approves the therapeutic product.The FDA has yet to issue further guidance, and it is unclear whether it will do so, or what the scope would be. The FDA previously has required in vitro companion diagnostics intended to select the patients who will respond to the cancer treatment to obtain Pre-MarketApproval, or PMA, simultaneously with approval of the drug. Based on the draft guidance, and the FDA’s past treatment of companion diagnostics, webelieve that the FDA will require one or more of our in vitro companion diagnostics to obtain PMA for our companion diagnostics to identify patientpopulations suitable for our cancer therapies, such as the in vitro companion diagnostic for VS-507, VS-4818 or VS-5095. The review of these in vitrocompanion diagnostics in conjunction with the review of our cancer treatments involves coordination of review by CDER and by the FDA’s Center for Devicesand Radiological Health Office of In Vitro Diagnostics Device Evaluation and Safety. 34Table of Contents PMA approval pathway A medical device, including an in vitro diagnostic, or IVD, to be commercially distributed in the United States must receive either 510(k) clearance or PMAapproval from the FDA prior to marketing. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life supporting or implantabledevices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a preamendment class III device for which PMA applicationshave not been called, are placed in Class III requiring PMA approval. The PMA approval pathway requires proof of the safety and effectiveness of the deviceto the FDA’s satisfaction. The PMA approval pathway generally takes from one to three years or even longer from submission of the application. A PMA application for an IVD must provide extensive preclinical and clinical trial data. Preclinical data for an IVD includes many different tests, includinghow reproducible the results are when the same sample is tested multiple times by multiple users at multiple laboratories. The clinical data need to establishthat the test is sufficiently safe, effective and reliable in the intended use population. In addition, the FDA must be convinced that a device has clinical utility,meaning that an IVD provides information that is clinically meaningful. A biomarker’s clinical significance may be obvious, or the applicant may be able torely upon published literature or submit data to show clinical utility. A PMA application also must provide information about the device and its components regarding, among other things, device design, manufacturing andlabeling. The sponsor must pay an application fee. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with Quality System Regulation, or QSR,requirements, which impose elaborate testing, control, documentation and other quality assurance procedures. Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the FDA accepts theapplication for filing. The FDA then commences an in-depth review of the PMA application. The entire process typically takes one to three years, but maytake longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided.The FDA also may respond with a not approvable determination based on deficiencies in the application and require additional clinical trials that are oftenexpensive and time-consuming and can substantially delay approval. During the review period, an FDA advisory committee, typically a panel of clinicians, may be convened to review the application and recommend to the FDAwhether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendationis important to the FDA’s overall decision making process. If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an approvable letter requiring the applicant’s agreement to specificconditions, such as changes in labeling, or specific additional information, such as submission of final labeling, in order to secure final approval of the PMA.If the FDA concludes that the applicable criteria have been met, the FDA will issue a PMA for the approved indications, which can be more limited than thoseoriginally sought by the manufacturer. The PMA can include post-approval conditions that the FDA believes necessary to ensure the safety and effectivenessof the device, including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with 35Table of Contents the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement may be required in the event of a modification to the device, its labeling or its manufacturingprocess. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement isgenerally limited to the information needed to support the proposed change from the product covered by the original PMA. Clinical trials A clinical trial is almost always required to support a PMA application. In some cases, one or more smaller Investigational Device Exemption, or IDE, studiesmay precede a pivotal clinical trial intended to demonstrate the safety and efficacy of the investigational device. All clinical studies of investigational devices must be conducted in compliance with the FDA’s requirements. If an investigational device could pose asignificant risk to patients pursuant to FDA regulations, the FDA must approve an IDE application prior to initiation of investigational use. IVD trials usuallydo not require an IDE, as the FDA does not judge them to be a significant risk because the results do not affect the patients in the study. However, for a trialwhere the IVD result directs the therapeutic care of patients with cancer, we believe that the FDA would consider the investigation to present significant risk. An IDE application must be supported by appropriate data, such as laboratory test results, showing that it is safe to test the device in humans and that thetesting protocol is scientifically sound. The FDA typically grants IDE approval for a specified number of patients. A nonsignificant risk device does notrequire FDA approval of an IDE. Both significant risk and nonsignificant risk investigational devices require approval from IRBs at the study centers wherethe device will be used. During the trial, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting and record keeping. Theinvestigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigationaldevices and comply with all reporting and record keeping requirements. Prior to granting PMA approval, the FDA typically inspects the records relating to theconduct of the study and the clinical data supporting the PMA application for compliance with applicable requirements. Although the QSR does not fully apply to investigational devices, the requirement for controls on design and development does apply. The sponsor also mustmanufacture the investigational device in conformity with the quality controls described in the IDE application and any conditions of IDE approval that theFDA may impose with respect to manufacturing. Post-market After a device is on the market, numerous regulatory requirements apply. These requirements include: the QSR, labeling regulations, the FDA’s generalprohibition against promoting products for unapproved or “off label” uses, the Medical Device Reporting regulation, which requires that manufacturers reportto the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to adeath or serious injury if it were to recur, and the Reports of Corrections and Removals regulation, which requires manufacturers to report recalls and fieldactions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA. 36Table of Contents The FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety of enforcementactions, ranging from a public warning letter to more severe sanctions such as: fines, injunctions and civil penalties; recall or seizure of products; operatingrestrictions, partial suspension or total shutdown of production; refusing requests for PMA approval of new products; withdrawing PMA approvals alreadygranted; and criminal prosecution. Other regulatory requirements Any drug manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, amongother things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting ofadverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims aresubject to prior FDA review and approval. The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketingtesting, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.Regulatory approval of oncology products often requires that patients in clinical trials be followed for long periods to determine the overall survival benefit ofthe drug. In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishmentswith the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMPrequirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulationsalso require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and any third-partymanufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and qualitycontrol to maintain cGMP compliance. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problemsoccur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipatedseverity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling toadd new safety information, imposition of post-market studies or clinical trials to assess new safety risks or imposition of distribution or other restrictionsunder a Risk Evaluation and Mitigation Strategy program. Other potential consequences include, among other things: · restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; · fines, warning letters or holds on post-approval clinical trials; · refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals; · product seizure or detention, or refusal to permit the import or export of products; or · consent decrees, injunctions or the imposition of civil or criminal penalties. 37Table of Contents The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for theapproved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulationsprohibiting the promotion of off label uses, and a company that is found to have improperly promoted off label uses may be subject to significant liability. Additional provisions Anti-kickback and false claims laws In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certainmarketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal healthcareprogram anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or inreturn for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaidor other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the onehand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminalfines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions andregulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawnnarrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do notqualify for an exemption or safe harbor. Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, orknowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies havebeen prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicareand Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programsfor the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also havestatutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and otherstate programs, or, in several states, apply regardless of the payor. Physician drug samples As part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. The Prescription DrugMarketing Act, or the PDMA, imposes requirements and limitations upon the provision of drug samples to physicians, as well as prohibits states fromlicensing distributors of prescription drugs unless the state licensing program meets certain federal guidelines that include minimum standards for storage,handling and record keeping. In addition, the PDMA sets forth civil and criminal penalties for violations. 38Table of Contents Foreign regulation In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countriesregarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products.Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable regulatory authorities of foreigncountries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and caninvolve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from andbe longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delayin obtaining regulatory approval in one country may negatively impact the regulatory process in others. To date, we have not initiated any discussions with the European Medicines Agency or any other foreign regulatory authorities with respect to seekingregulatory approval for any of our products in Europe or in any other country outside the United States. New legislation and regulations From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the testing,approval, manufacturing and marketing of products regulated by the FDA. For example, the FDAAA discussed above was enacted in 2007. In addition to newlegislation, FDA regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products. Itis impossible to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies or interpretations changed or whatthe effect of such changes, if any, may be. Pharmaceutical coverage, pricing and reimbursement Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtain regulatory approval. Sales of any of ourproduct candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, includinggovernment health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determiningwhether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will payfor the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, whichmight not include all of the approved drugs for a particular indication. In order to secure coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studiesin order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparableregulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drugproduct does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to enable us to maintain pricelevels high enough to realize an appropriate return on our investment in product development. The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort.Third-party payors are increasingly challenging the prices charged for medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third-party payors do not 39Table of Contents consider our products to be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plansor, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit. The U.S. government, state legislatures and foreigngovernments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, includingprice controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. Adoption of such controlsand measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals such as thedrug candidates that we are developing and could adversely affect our net revenue and results. Pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after areimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particularproduct candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drugproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. EuropeanUnion member states may approve a specific price for a drug product or may instead adopt a system of direct or indirect controls on the profitability of thecompany placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and controlcompany profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasinglyhigh barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitivepressure that may reduce pricing within a country. There can be no assurance that any country that has price controls or reimbursement limitations for drugproducts will allow favorable reimbursement and pricing arrangements for any of our products. The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail toprovide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and we expect willcontinue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. Inparticular, the Patient Protection and Affordable Care Act was enacted in the United States in March 2010 and contain provisions that may reduce theprofitability of drug products, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaidmanaged care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales tofederal health care programs. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatoryapproval, less favorable coverage policies and reimbursement rates may be implemented in the future. EMPLOYEES As of March 15, 2012, we had 21 full-time employees, including a total of ten employees with M.D. or Ph.D. degrees. Of these full-time employees, 12employees are engaged in research and development activities. None of our employees is represented by a labor union or covered by a collective bargainingagreement. We consider our relationship with our employees to be good. 40Table of Contents OUR CORPORATE INFORMATION We were incorporated under the laws of the State of Delaware in August 2010. Our principal executive offices are located at 215 First Street, Suite 440,Cambridge, Massachusetts 02142 and our telephone number is (617) 252-9300. ADDITIONAL INFORMATION We maintain a website at www.verastem.com. We make available, free of charge on our website, our annual report on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file those reports with, or furnish them to, theSecurities and Exchange Commission, or SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers,directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided tous by those persons. The information contained on, or that can be accessed through, our website is not a part of or incorporated by reference in this annualreport on Form 10-K. 41Table of Contents ITEM 1A. Risk Factors. RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL We have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintainprofitability. Since inception, we have incurred significant operating losses. Our net loss was $13.7 million for the year ended December 31, 2011. As of December 31,2011, we had a deficit accumulated during the development stage of $14.5 million. To date, we have not generated any revenues and have financed ouroperations through private placements of our preferred stock and our initial public offering completed in February 2012. We have devoted substantially all ofour efforts to research and development. We have not initiated clinical development of any product candidates and expect that it will be many years, if ever,before we have a product candidate ready for commercialization. We expect to continue to incur significant expenses and increasing operating losses for theforeseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if andas we: · continue our research and preclinical development of our product candidates; · seek to identify additional product candidates that target cancer stem cells, or CSCs; · acquire or in-license other products and technologies; · initiate clinical trials for our product candidates; · seek marketing approvals for our product candidates that successfully complete clinical trials; · ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; · maintain, expand and protect our intellectual property portfolio; · hire additional clinical, quality control and scientific personnel; and · add operational, financial and management information systems and personnel, including personnel to support our product development and plannedfuture commercialization efforts. To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This will require usto be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, obtaining marketingapproval for these product candidates and manufacturing, marketing and selling those products for which we may obtain marketing approval. We may neversucceed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. We are currently only inthe preclinical testing stages for our most advanced product candidates and have not yet completed formulation development of any of our lead productcandidates, VS-507, VS-4718 and VS-5095. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annualbasis. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, maintain ourresearch and 42Table of Contents development efforts, expand our business or continue our operations. A decline in the value of our company could also cause you to lose all or part of yourinvestment. Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability. We are an early stage company. We commenced active operations in the second half of 2010. Our operations to date have been limited to organizing and staffingour company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertakingpreclinical studies of our most advanced product candidates. We completed our initial public offering in February 2012. All of our product candidates are stillin preclinical development. We have not yet demonstrated our ability to initiate or successfully complete any clinical trials, including large-scale, pivotalclinical trials, obtain marketing approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales andmarketing activities necessary for successful product commercialization. It takes about ten to 15 years to develop one new medicine from the time it isdiscovered to when it is available for treating patients. Consequently, any predictions you make about our future success or viability may not be as accurate asthey could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We willneed to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such atransition. We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate ourproduct development programs or commercialization efforts. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and later initiate clinicaltrials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expectto incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtainsubstantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would beforced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We expect that the net proceeds from our initial public offering completed in February 2012, together with our existing cash, cash equivalents and investments,will enable us to fund our current operating plan and capital expenditure requirements into 2016. Our future capital requirements will depend on many factors,including: · the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for our product candidates; · the extent to which we acquire or in-license other products and technologies; · the costs, timing and outcome of regulatory review of our product candidates; · the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidatesfor which we receive marketing approval; · revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; 43Table of Contents · the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectualproperty-related claims; and · our ability to establish collaborations on favorable terms, if at all. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takesyears to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, ourproduct candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do notexpect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our businessobjectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies orproduct candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debtfinancings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raiseadditional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms ofthese securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, mayinvolve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capitalexpenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rightsto our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we areunable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our productdevelopment or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and marketourselves. RISKS RELATED TO THE DISCOVERY, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES Our approach to the discovery and development of product candidates that target CSCs is unproven, and we do not know whether we will be ableto develop any products of commercial value. Our scientific approach focuses on using proprietary technology to create a stable population of CSCs in the laboratory that we then use to screen for andidentify product candidates targeting these CSCs. Research on CSCs is an emerging field and, consequently, there is ongoing debate regarding the existence ofCSCs, whether the appropriate nomenclature to refer to these cells is cancer stem cells, tumor-initiating cells or another term and the importance of these cellsas an underlying cause of tumor recurrence and metastasis. Although there is general consensus that some cancer cells have tumor-initiating capacity, there also is some debate in the scientific community regarding thedefining characteristics of these cells, which we call CSCs, and the origin of these cells. Some believe that normal adult stem cells mutate and transform intoCSCs. Others believe that all cancer cells have tumor-initiating capabilities, these capabilities cannot be attributed to a factor 44Table of Contents intrinsic to a particular cell and, therefore, a definitive CSC cannot be isolated or targeted. We believe that the discovery by our scientific co-founders of thelink between the epithelial-to-mesenchymal transition, or EMT, and the emergence of cancer stem cells is one way a cancer cell can transition to a CSC, butthis view is not universally accepted. Even if our beliefs regarding the existence, characteristics and function of CSCs are correct, any drugs that we develop may not effectively target CSCs. We donot believe that any drugs that target CSCs have been successfully developed to date for the treatment of cancer. If we are able to develop a drug that targetsCSCs in preclinical studies, we may nonetheless not succeed in demonstrating safety and efficacy of the drug in human clinical trials. Our focus on using ourproprietary technology to screen for and identify product candidates targeting CSCs may not result in the discovery and development of commercially viabledrugs to treat cancer. We may not be successful in our efforts to identify or discover additional potential product candidates. A key element of our strategy is to identify and test additional compounds that target CSCs in a variety of different types of cancer. A significant portion of theresearch that we are conducting involves new compounds, new uses of existing compounds and new and unproven drug discovery methods, including ourproprietary technology. The drug discovery that we are conducting using our EMT technology may not be successful in identifying compounds that are usefulin treating cancer. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates forclinical development for a number of reasons, including: · the research methodology used may not be successful in identifying potential product candidates; or · potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to beproducts that will receive marketing approval and achieve market acceptance. In particular, because our EMT technology induces the EMT process to create a stable population of CSCs, it is possible that these stable CSCs may not reactin precisely the same manner as naturally occurring CSCs when treated with a particular product candidate. As a result, a product candidate that shows initialpromise in targeting our stable population of CSCs may not have the same effect on tumors with naturally occurring CSCs. Research programs to identify new product candidates require substantial technical, financial and human resources. We may choose to focus our efforts andresources on a potential product candidate that ultimately proves to be unsuccessful. If we are unable to identify suitable compounds for preclinical and clinical development, we will not be able to obtain product revenues in future periods,which likely would result in significant harm to our financial position and adversely impact our stock price. We may not be successful in obtaining necessary rights to compounds and product candidates for our development pipeline through acquisitionsand in-licenses. Because we are screening a range of compounds, including compounds with proprietary rights held by third parties, for their activity against CSCs, thegrowth of our business will depend in significant part on our ability to acquire or in-license rights to these compounds. However, we may be unable to acquireor in-license any compounds or product candidates from third parties that we identify using our proprietary EMT technology or 45Table of Contents otherwise. The licensing and acquisition of proprietary compounds is a competitive area, and a number of more established companies are also pursuingstrategies to license or acquire compounds and product candidates that we may consider attractive. These established companies may have a competitiveadvantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. For example, although the Broad Institute has granted us a right of first negotiation for specified compounds and other intellectual property owned by theBroad Institute, we may be unable to negotiate a license within the specified time frame. If we are unable to do so, the Broad Institute may offer the intellectualproperty to other parties. In addition, the Whitehead Institute and affiliated parties have retained the right to use the EMT technology that we license from it forresearch, teaching and educational purposes and could seek to license to third parties any intellectual property rights that it discovers using the EMTtechnology while pursuing these purposes. Pursuant to our drug discovery platform license agreement with the Whitehead Institute, we will have anopportunity, subject to the Whitehead Institute’s obligations under any third-party research funding agreements, to negotiate a license to any such intellectualproperty under the drug discovery platform license agreement that is developed or conceived on or prior to a specified date in Robert Weinberg’s laboratory atthe Whitehead Institute. Our failure to reach an agreement with either the Broad Institute or the Whitehead Institute for any applicable intellectual property couldresult in a third party acquiring the related rights. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire therelevant compound or product candidate on terms that would allow us to make an appropriate return on our investment. In addition, we expect competition for acquisition and in-licensing product candidates that are attractive to us may increase in the future, especially if ourapproach of targeting CSCs gains greater scientific acceptance, which may mean fewer suitable opportunities for us as well as higher acquisition or licensingprices. If we are unable to successfully obtain rights to suitable compounds or product candidates, our business, financial condition and prospects for growthcould suffer. All of our product candidates are still in preclinical development. Preclinical testing and clinical trials of our product candidates may not besuccessful. If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materiallyharmed. We have invested a significant portion of our efforts and financial resources in the identification and preclinical development of drugs that target CSCs. Ourability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development andeventual commercialization of our product candidates. The success of our product candidates will depend on several factors, including the following: · successful completion of preclinical studies and clinical trials; · receipt of marketing approvals from applicable regulatory authorities; · establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; · obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; 46Table of Contents · launching commercial sales of the products, if and when approved, whether alone or in collaboration with others; · acceptance of the products, if and when approved, by patients, the medical community and third-party payors; · effectively competing with other therapies; and · a continued acceptable safety profile of the products following approval. If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfullycommercialize our product candidates, which would materially harm our business. If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwiseproduce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the developmentand commercialization of our product candidates. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must complete preclinical development and thenconduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to designand implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. Theoutcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do notnecessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies thathave believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval oftheir products. For example, standard measures of clinical activity with respect to solid tumors, such as Response Criteria in Solid Tumors, or RECIST,measurement guidelines, which are based on gross changes in the size of tumor lesions, may not be sufficient to detect the targeting of CSCs by our productcandidates. We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval orcommercialize our product candidates, including: · regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospectivetrial site; · we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites; · clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conductadditional clinical trials or abandon product development programs; · the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may beslower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate; 47Table of Contents · our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; · we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are beingexposed to unacceptable health risks; · regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, includingnoncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks; · the cost of clinical trials of our product candidates may be greater than we anticipate; · the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient orinadequate; and · our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or institutionalreview boards to suspend or terminate the trials. If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable tosuccessfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positiveor if there are safety concerns, we may: · be delayed in obtaining marketing approval for our product candidates; · not obtain marketing approval at all; · obtain approval for indications or patient populations that are not as broad as intended or desired; · obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings; · be subject to additional post-marketing testing requirements; or · have the product removed from the market after obtaining marketing approval. Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinical trials willbegin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods duringwhich we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impairour ability to successfully commercialize our product candidates and may harm our business and results of operations. If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayedor prevented. We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patientsto participate in these trials as required by the U.S. Food and Drug Administration, or FDA, or similar regulatory authorities outside the United States. Inaddition, many of 48Table of Contents our competitors have ongoing clinical trials for product candidates that treat the same indications as our product candidates, and patients who would otherwisebe eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates. Patient enrollment is affected by other factors including: · severity of the disease under investigation; · eligibility criteria for the study in question; · perceived risks and benefits of the product candidate under study; · efforts to facilitate timely enrollment in clinical trials; · patient referral practices of physicians; · the ability to monitor patients adequately during and after treatment; and · proximity and availability of clinical trial sites for prospective patients. Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or may require us to abandon one or more clinicaltrials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value ofour company to decline and limit our ability to obtain additional financing. If serious adverse or inappropriate side effects are identified during the development of our product candidates, we may need to abandon or limitour development of some of our product candidates. All of our product candidates are still in preclinical development and their risk of failure is high. It is impossible to predict when or if any of our productcandidates will prove effective or safe in humans or will receive marketing approval. If our product candidates are associated with undesirable side effects orhave characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which theundesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds thatinitially showed promise in early stage testing for treating cancer have later been found to cause side effects that prevented further development of thecompound. We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates orindications that may be more profitable or for which there is a greater likelihood of success. Because we have limited financial and managerial resources, we focus on research programs and product candidates that we identify for specific indications.As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercialpotential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spendingon current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. Ifwe do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that productcandidate through collaboration, licensing or other royalty arrangements in cases 49Table of Contents in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doingso, we may not realize the full commercial potential of our therapeutics. We plan to develop companion diagnostics for our therapeutic product candidates. There has been limited success to date industry wide in developing thesetypes of companion diagnostics. To be successful, we would need to address a number of scientific, technical and logistical challenges. We have only recentlyinitiated development of companion diagnostics. We have limited experience in the development of diagnostics and may not be successful in developingappropriate diagnostics to pair with any of our therapeutic product candidates that receive marketing approval. Companion diagnostics are subject toregulation by the FDA and similar regulatory authorities outside the United States as medical devices and require separate regulatory approval prior tocommercialization. Given our limited experience in developing diagnostics, we expect to rely in part on third parties for their design and manufacture. If we orany third parties that we engage to assist us, are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experiencedelays in doing so: · the development of our therapeutic product candidates may be adversely affected if we are unable to appropriately select patients for enrollment in ourclinical trials; · our therapeutic product candidates may not receive marketing approval if safe and effective use of a therapeutic product candidate depends on an in vitrodiagnostic; and · we may not realize the full commercial potential of any therapeutics that receive marketing approval if, among other reasons, we are unable toappropriately select patients who are likely to benefit from therapy with our drugs. As a result, our business would be harmed, possibly materially. Even if any of our product candidates receive marketing approval, they may fail to achieve the degree of market acceptance by physicians, patients,healthcare payors and others in the medical community necessary for commercial success. If any of our product candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients,healthcare payors and others in the medical community. For example, current cancer treatments like chemotherapy and radiation therapy are well established inthe medical community, and doctors may continue to rely on these treatments. If our product candidates do not achieve an adequate level of acceptance, wemay not generate significant product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved forcommercial sale, will depend on a number of factors, including: · efficacy and potential advantages compared to alternative treatments; · the ability to offer our products for sale at competitive prices; · convenience and ease of administration compared to alternative treatments; 50Table of Contents · the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; · the strength of marketing and distribution support; · sufficient third-party coverage or reimbursement; and · the prevalence and severity of any side effects. If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market ourproduct candidates, we may not be successful in commercializing our product candidates if and when they are approved. We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achievecommercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. In thefuture, we may choose to build a focused sales and marketing infrastructure to market or co-promote some of our product candidates if and when they areapproved. There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform theseservices. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch ofa product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would haveprematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain orreposition our sales and marketing personnel. Factors that may inhibit our efforts to commercialize our products on our own include: · our inability to recruit and retain adequate numbers of effective sales and marketing personnel; · the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products; · the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with moreextensive product lines; and · unforeseen costs and expenses associated with creating an independent sales and marketing organization. If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these productrevenues to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful inentering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are favorable to us. We likelywill have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our productseffectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not besuccessful in commercializing our product candidates. We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully thanwe do. 51Table of Contents The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates, andwill face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceuticalcompanies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnologycompanies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we aredeveloping our product candidates. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to ourapproach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other publicand private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development,manufacturing and commercialization. We are developing our product candidates for the treatment of cancer. There are a variety of available therapies marketed for cancer. In many cases, these drugsare administered in combination to enhance efficacy. Some of these drugs are branded and subject to patent protection, and others are available on a genericbasis. Many of these approved drugs are well established therapies and are widely accepted by physicians, patients and third-party payors. Insurers and otherthird-party payors may also encourage the use of generic products. We expect that if our product candidates are approved, they will be priced at a significantpremium over competitive generic products. This may make it difficult for us to achieve our business strategy of using our product candidates in combinationwith existing therapies or replacing existing therapies with our product candidates. There are also a number of products in clinical development by third parties to treat cancer by targeting CSCs. These companies include divisions of largepharmaceutical companies, including Astellas Pharma US, Inc., Sanofi-Aventis US LLC, GlaxoSmithKline plc, Boehringer Ingelheim GmbH, Pfizer Inc.and others. There are also biotechnology companies of various size that are developing therapies against CSCs, including OncoMed Pharmaceuticals, Inc.,Boston Biomedical, Inc. and Stemline Therapeutics, Inc. Our competitors may develop products that are more effective, safer, more convenient or less costlythan any that we are developing or that would render our product candidates obsolete or non-competitive. In addition, our competitors may discoverbiomarkers that more efficiently measure CSCs than our methods, which may give them a competitive advantage in developing potential products. Ourcompetitors may also obtain marketing approval from the FDA or other regulatory authorities for their products more rapidly than we may obtain approval forours, which could result in our competitors establishing a strong market position before we are able to enter the market. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing,conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical andbiotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stagecompanies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These thirdparties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration forclinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third-partyreimbursement practices or healthcare reform initiatives, which would harm our business. 52Table of Contents The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. In the UnitedStates, recently passed legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays inobtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period beginsafter marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuinggovernmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then besubject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are ableto generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more productcandidates, even if our product candidates obtain marketing approval. Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatmentswill be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-partypayors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels.A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to controlcosts by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companiesprovide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursementwill be available for any product that we commercialize and, if reimbursement is available, the level of reimbursement. Reimbursement may impact thedemand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining reimbursement for our products may be particularlydifficult because of the higher prices often associated with drugs administered under the supervision of a physician. If reimbursement is not available or isavailable only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval. There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which thedrug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement does not imply that any drugwill be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursementlevels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according tothe use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporatedinto existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programsor private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than inthe United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Ourinability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any approved products that wedevelop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financialcondition. Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we maydevelop. 53Table of Contents We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater riskif we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or productscaused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in: · decreased demand for any product candidates or products that we may develop; · injury to our reputation and significant negative media attention; · withdrawal of clinical trial participants; · significant costs to defend the related litigation; · substantial monetary awards to trial participants or patients; · loss of revenue; and · the inability to commercialize any products that we may develop. We currently hold $3.0 million in product liability insurance coverage in the aggregate, with a per incident limit of $3.0 million, which may not be adequate tocover all liabilities that we may incur. We may need to increase our insurance coverage when we begin clinical trials or the commercialization of our productcandidates, if ever. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amountadequate to satisfy any liability that may arise. If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs thatcould have a material adverse effect on the success of our business. We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use,storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicalsand biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materialsand wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use ofhazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costsassociated with civil or criminal fines and penalties. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from theuse of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmentalliability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current orfuture laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result insubstantial fines, penalties or other sanctions. 54Table of Contents RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES We expect to depend on collaborations with third parties for the development and commercialization of our product candidates. If thosecollaborations are not successful, we may not be able to capitalize on the market potential of these product candidates. We may seek third-party collaborators for the development and commercialization of our product candidates. Our likely collaborators for any collaborationarrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. If we doenter into any such arrangements with any third parties, we will likely have limited control over the amount and timing of resources that our collaboratorsdedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on ourcollaborators’ abilities to successfully perform the functions assigned to them in these arrangements. Collaborations involving our product candidates would pose the following risks to us: · collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; · collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development orcommercialization programs based on clinical trial results, changes in the collaborator’s strategic focus or available funding or external factors such as anacquisition that diverts resources or creates competing priorities; · collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate,repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; · collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or productcandidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that aremore economically attractive than ours; · a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution ofsuch product or products; · collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invitelitigation that could jeopardize or invalidate our proprietary information or expose us to potential litigation; · disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of ourproducts or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and · collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of theapplicable product candidates. Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a present or futurecollaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercializationprogram could be delayed, diminished or terminated. 55Table of Contents If we are not able to establish collaborations, we may have to alter our development and commercialization plans. Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. Forsome of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potentialcommercialization of those product candidates. We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among otherthings, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposedcollaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA orsimilar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturingand delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology,which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. Thecollaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such acollaboration could be more attractive than the one with us for our product candidate. We may also be restricted under existing license agreements from enteringinto agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, therehave been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potentialfuture collaborators. We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail thedevelopment of such product candidate, reduce or delay its development program or one or more of our other development programs, delay its potentialcommercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercializationactivities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtainadditional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop ourproduct candidates or bring them to market and generate product revenue. We expect to rely on third parties to conduct our clinical trials and some aspects of our compound formulation research and preclinical testing,and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, research or testing. We do not plan to independently conduct all aspects of clinical trials of our product candidates. In addition, we do not expect to independently conduct allaspects of our compound formulation research or preclinical testing of our product candidates. We expect to rely on third parties, such as contract researchorganizations, clinical data management organizations, medical institutions and clinical investigators, to conduct our clinical trials. We currently rely andexpect to continue to rely on third parties to conduct some aspects of our compound formulation research and preclinical testing. For example, we currently relyon third parties in the development of various formulations of VS-507, VS-4718 and VS-5095. We cannot finish preclinical testing and initiate clinical trialsof these product candidates until the development of a formulation is complete. Any of these third parties may terminate their engagements with us at any time.If we need to enter into alternative arrangements, it would delay our product development activities. 56Table of Contents Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of ourresponsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigationalplan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting,recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity andconfidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on agovernment-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminalsanctions. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do notsuccessfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our statedprotocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may bedelayed in our efforts to, successfully commercialize our product candidates. We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributorscould delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses anddepriving us of potential product revenue. We contract with third parties for the manufacture of our product candidates for preclinical testing and expect to continue to do so for clinicaltrials and for commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our productcandidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercializationefforts. We do not have any manufacturing facilities or personnel. We currently rely, and expect to continue to rely, on third-party manufacturers for the manufactureof our product candidates for preclinical testing, other than small amounts of compounds that we may synthesize ourselves for such purpose. To date, wehave obtained starting materials for our supply of the cGMP bulk drug substance for our product candidates from one third-party manufacturer. We do nothave a long term supply agreement with this third-party manufacturer, and we purchase our required drug supply on a purchase order basis. We expect to rely on third-party manufacturers or third-party collaborators for the manufacture of our product candidates for clinical trials and for commercialsupply of any of these product candidates for which we or our collaborators obtain marketing approval. We may be unable to establish any agreements withthird-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-partymanufacturers entails additional risks, including: · reliance on the third party for regulatory compliance and quality assurance; · the possible breach of the manufacturing agreement by the third party; and · the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. 57Table of Contents Third-party manufacturers may not be able to comply with current good manufacturing practices, or cGMP, regulations or similar regulatory requirementsoutside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions beingimposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of productcandidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products andharm our business and results of operations. Any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limitednumber of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us. Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently havearrangements in place for redundant supply or a second source for bulk drug substance. If our current contract manufacturer cannot perform as agreed, wemay be required to replace that manufacturer. Although we believe that there are several potential alternative manufacturers who could manufacture our productcandidates, we may incur added costs and delays in identifying and qualifying any such replacement. Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profitmargins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis. RISKS RELATED TO OUR INTELLECTUAL PROPERTY If we fail to comply with our obligations under our intellectual property licenses with third parties, we could lose license rights that are importantto our business. We are a party to a number of intellectual property license agreements with third parties, including the Whitehead Institute and Poniard Pharmaceuticals, Inc.,or Poniard, and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future licenseagreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. For example, under our license agreements withthe Whitehead Institute and Poniard, we are required to use commercially reasonable efforts to develop and commercialize licensed products under theagreement and to satisfy other specified obligations. If we fail to comply with our obligations under these licenses, our licensors may have the right to terminatethese license agreements, in which event we might not be able to market any product that is covered by these agreements, or to convert the exclusive licenses tonon-exclusive licenses, which could materially adversely affect the value of the product candidate being developed under these license agreements. Terminationof these license agreements or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorableterms. If the Whitehead Institute were to terminate its drug discovery platform license agreement with us for any reason, we would lose access to the EMTtechnology and the ability to use the stable population of CSCs for high-throughput screening. If Poniard were to terminate its license agreement with us for anyreason, we would lose our rights to VS-4718 and VS-5095. If we are unable to obtain and maintain patent protection for our technology and products, or if our licensors are unable to obtain and maintainpatent protection for the technology or products that we license from them, or if the scope of the patent protection obtained is not sufficientlybroad, our competitors could 58Table of Contents develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology andproducts may be adversely affected. Our success depends in large part on our and our licensors’ ability to obtain and maintain patent protection in the United States and other countries withrespect to our proprietary technology and products. We and our licensors seek to protect our proprietary position by filing patent applications in the UnitedStates and abroad related to our novel technologies and products that are important to our business. To date, one U.S. patent has issued that covers an aspectof our proprietary technology, with claims covering certain methods of predicting the likelihood that a tumor will metastasize. However, no patents have issuedthat cover our proprietary EMT technology or our product candidates, and we cannot be certain that any patents will issue with claims that cover ourproprietary EMT technology or product candidates. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications ata reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is toolate to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patentapplications, or to maintain the patents, covering technology or products that we license from third parties and are reliant on our licensors. For example, we donot control the prosecution of the patent applications licensed to us under our agreements with the Whitehead Institute or those patent applications owned byThe Scripps Research Institute, or Scripps, licensed to us under our agreement with Poniard. Therefore, we cannot be certain that these patents andapplications will be prosecuted and enforced in a manner consistent with the best interests of our business. If such licensors fail to maintain such patents, orlose rights to those patents, the rights we have licensed may be reduced or eliminated. The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has inrecent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our licensors’ patentrights are highly uncertain. Our and our licensors’ pending and future patent applications may not result in patents being issued which protect our technologyor products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretationof the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientificliterature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until18 months after filing, or in some cases not at all. Therefore we cannot be certain that we or our licensors were the first to make the inventions claimed in ourowned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, currently, in the United States, the first to make the claimed invention is entitled to the patent, whileoutside the United States, the first to file a patent application is entitled to the patent. In March 2013, the United States will transition to a first inventor to filesystem in which, assuming the other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent. We maybe subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation,reexamination, inter parties review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in anysuch submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow 59Table of Contents third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture orcommercialize products without infringing third-party patent rights. Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, preventcompetitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned orlicensed patents by developing similar or alternative technologies or products in a non-infringing manner. For example, although we expect to file additionalpatent applications with respect to our product candidate VS-507 with claims directed to its formulation and method of use, patent protection is not availablefor composition of matter claims directed to its active pharmaceutical ingredient. Because VS-507 lacks composition of matter protection for its activepharmaceutical ingredient, competitors will be able to offer and sell products with the same active pharmaceutical ingredient so long as these competitors do notinfringe any other patents that we may obtain covering this drug. The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged inthe courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims beingnarrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology andproducts, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing andregulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As aresult, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identicalto ours. We may become involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful. Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensiveand time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, or may refuse to stop theother party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigationproceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount ofdiscovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised bydisclosure during this type of litigation. In addition, our licensors may have rights to file and prosecute such claims and we are reliant on them. Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would beuncertain and could have a material adverse effect on the success of our business. Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates anduse our proprietary technologies without infringing the proprietary rights of third parties. We have yet to conduct comprehensive freedom-to-operate searches todetermine whether our use of certain of the patent rights owned by or licensed to us would infringe patents issued to third parties. We may become party to, orthreatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, includinginterference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing patents 60Table of Contents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license fromsuch third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license oncommercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the sametechnologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we couldbe found liable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some ofour business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of thirdparties could have a similar negative impact on our business. For example, we are aware of a U.S. patent application filed by a third party almost one year after the priority date of the U.S. patent application filed byScripps and licensed to us by Poniard, which has pending generic claims that, if issued as written, potentially cover VS-4718 and VS-5095. The third-partypatent application also specifically discloses VS-4718. Although the Scripps patent application has a priority date that is earlier than the priority date of thethird-party application, we cannot be sure which party was the first to make the claimed invention. Because the United States currently uses a first to inventstandard to determine priority, if a patent issues under the third-party patent application covering the composition of matter of VS-4718 or VS-5095 and suchthird party was determined to be the first to make the claimed invention, we would need to obtain a license to the patented technology to commercialize VS-4718 or VS-5095 in the United States, which would cause us to incur licensing related costs. However, a license to this patent might not be available oncommercially reasonable terms, or at all. Our failure to obtain a license to any such patent could delay or prevent our potential commercialization of VS-4718or VS-5095 in the United States. We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potentialcompetitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may besubject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any suchemployee’s former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to payingmonetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation couldresult in substantial costs and be a distraction to management. Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and coulddistract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results ofhearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have asubstantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce theresources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resourcesto adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectivelythan we can because of their 61Table of Contents greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverseeffect on our ability to compete in the marketplace. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and otherproprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentialityagreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers,consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees andconsultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and wemay not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult,expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling toprotect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to preventthem from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by acompetitor, our competitive position would be harmed. RISKS RELATED TO REGULATORY APPROVAL OF OUR PRODUCT CANDIDATES AND OTHER LEGAL COMPLIANCE MATTERS If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our productcandidates, and our ability to generate revenue will be materially impaired. Our product candidates and the activities associated with their development and commercialization, including their design, testing, manufacture, safety,efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA andother regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidatewill prevent us from commercializing the product candidate. We have not received approval to market any of our product candidates from regulatoryauthorities in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect torely on third- party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical andclinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDAapproval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA.Our product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or othercharacteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials arerequired, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the productcandidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations,or changes in regulatory review for each submitted product application, may 62Table of Contents cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept anyapplication or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varyinginterpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Anymarketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product notcommercially viable. If we experience delays in obtaining approval or if we fail to obtain approval of our product candidates, the commercial prospects for our product candidatesmay be harmed and our ability to generate revenues will be materially impaired. Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad. In order to market and sell our products in the European Union and many other jurisdictions, we or our third-party collaborators must obtain separatemarketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involveadditional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval processoutside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States,it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may notobtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatoryauthorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatoryauthorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals tocommercialize our products in any market. Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may besubject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and ifany of them are approved. Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertisingand promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. Theserequirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirementsrelating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples tophysicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated usesfor which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitorthe safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for theapproved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply withregulatory requirements, may yield various results, including: 63Table of Contents · restrictions on such products, manufacturers or manufacturing processes; · restrictions on the labeling or marketing of a product; · restrictions on product distribution or use; · requirements to conduct post-marketing clinical trials; · warning or untitled letters; · withdrawal of the products from the market; · refusal to approve pending applications or supplements to approved applications that we submit; · recall of products; · fines, restitution or disgorgement of profits or revenue; · suspension or withdrawal of marketing approvals; · refusal to permit the import or export of our products; · product seizure; or · injunctions or the imposition of civil or criminal penalties. Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare lawsand regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits andfuture earnings. Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates for which weobtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and otherhealthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute ourproducts for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following: · the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving orproviding remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order orrecommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid; · the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities forknowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement toavoid, decrease or conceal an obligation to pay money to the federal government; 64Table of Contents · the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and ClinicalHealth Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, includingmandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information; · the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially falsestatement in connection with the delivery of or payment for healthcare benefits, items or services; · the federal transparency requirements under the Health Care Reform Law requires manufacturers of drugs, devices, biologics and medical supplies toreport to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownershipand investment interests; and · analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claimsinvolving healthcare items or services reimbursed by non-governmental third- party payors, including private insurers, and some state laws requirepharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidancepromulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and otherhealth care providers or marketing expenditures. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs.It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion fromgovernment funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians orother providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civilor administrative sanctions, including exclusions from government funded healthcare programs. Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our productcandidates and affect the prices we may obtain. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding thehealthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our abilityto profitably sell any product candidates for which we obtain marketing approval. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the wayMedicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a newreimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting thenumber of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage andprice that we receive for any 65Table of Contents approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicarecoverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MedicareModernization Act may result in a similar reduction in payments from private payors. More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance,reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care andhealth insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, theHealth Care Reform Law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drugrebates to states. Further, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products.Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with health care practitioners. We will notknow the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it istoo early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially underthe Medicare program, and may also increase our regulatory burdens and operating costs. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceuticalproducts. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will bechanged, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by theU.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labelingand post-marketing testing and other requirements. RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING GROWTH Our future success depends on our ability to retain our president and chief executive officer and other key executives and to attract, retain andmotivate qualified personnel. We are highly dependent on Christoph Westphal, our President and Chief Executive Officer, Robert Forrester, our Chief Operating Officer, and JonathanPachter, our Vice President, Head of Research, as well as the other principal members of our management and scientific teams, including our scientific co-founders, Robert Weinberg, Eric Lander and Piyush Gupta. Although we have formal employment agreements with Robert Forrester and Jonathan Pachter,these agreements do not prevent them from terminating their employment with us at any time. We do not have an employment agreement with ChristophWestphal. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any of these persons couldimpede the achievement of our research, development and commercialization objectives. In addition to his role as Chairman of the board of directors and President and Chief Executive Officer of our company, Dr. Westphal also serves as a generalpartner of Longwood Fund, LP, a venture capital investment fund and one of our principal stockholders. We and Dr. Westphal anticipate that he willtransition to an executive Chairman role at our company in the future based on our having meaningfully advanced our discovery, research and developmentefforts, the overall growth of our company and our identifying and hiring a suitable successor. In connection with Dr. Westphal’s transition to this role, we willneed to recruit and hire a 66Table of Contents new principal executive officer. Our inability to hire a suitable executive to assume this position in a timely fashion could delay the execution of our businessplans or disrupt our operations. Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not beable to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similarpersonnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely onconsultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy.Our consultants and advisors, including our scientific co-founders, may be employed by employers other than us and may have commitments underconsulting or advisory contracts with other entities that may limit their availability to us. We expect to expand our development, regulatory and future sales and marketing capabilities, and as a result, we may encounter difficulties inmanaging our growth, which could disrupt our operations. We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development,regulatory affairs and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operationaland financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and thelimited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion ofour operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert ourmanagement and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations. RISKS RELATED TO OUR COMMON STOCK Our executive officers, directors and principal stockholders maintain the ability to control all matters submitted to stockholders for approval. As of March 15, 2012, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock, in the aggregate,beneficially owned shares representing approximately 53% of our capital stock. As a result, if these stockholders were to choose to act together, they would beable to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to acttogether, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration ofvoting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to ourstockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management. Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholdersmay consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the pricethat investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition,because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts byour stockholders to replace or 67Table of Contents remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, theseprovisions: · establish a classified board of directors such that not all members of the board are elected at one time; · allow the authorized number of our directors to be changed only by resolution of our board of directors; · limit the manner in which stockholders can remove directors from the board; · establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors; · require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent; · limit who may call stockholder meetings; · authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would workto dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and · require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions ofour charter or bylaws. Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, whichprohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date ofthe transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribedmanner. If our stock price is volatile, our stockholders could incur substantial losses. Our stock price is likely to be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extremevolatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, our stockholders could incursubstantial losses. The market price for our common stock may be influenced by many factors, including: · the success of competitive products or technologies; · results of clinical trials of our product candidates or those of our competitors; · regulatory or legal developments in the United States and other countries; · developments or disputes concerning patent applications, issued patents or other proprietary rights; · the recruitment or departure of key personnel; · the level of expenses related to any of our product candidates or clinical development programs; 68Table of Contents · the results of our efforts to discover, develop, acquire or in-license additional product candidates or products; · actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; · variations in our financial results or those of companies that are perceived to be similar to us; · changes in the structure of healthcare payment systems; · market conditions in the pharmaceutical and biotechnology sectors; · general economic, industry and market conditions; and · the other factors described in this “Risk factors” section. We incur significant costs as a result of operating as a newly-public company, and our management must devote substantial time to newcompliance initiatives. As a newly public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the Securities and Exchange Commission and NASDAQ have imposed various requirements onpublic companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Ourmanagement and other personnel must devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increasedour legal and financial compliance costs and make some activities more time-consuming and costly. Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be thesource of gain for our stockholders. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth anddevelopment of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, ifany, of our common stock will be the sole source of gain for our stockholders for the foreseeable future. A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future,which could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market thatthe holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of March 15, 2012, we had outstanding21,059,116 shares of common stock, of which 6,325,000 may be resold in the public market immediately without restriction, unless purchased by ouraffiliates or existing stockholders. The remaining 14,734,116 shares are currently restricted as a result of securities laws or lock-up agreements that extenduntil either July 24, 2012 or January 20, 2013. Moreover, holders of an aggregate of 11,740,794 shares of our common stock will have rights, subject tosome conditions, to require us to file registration statements covering their shares or, along with holders of an additional 2,826,708 shares of our commonstock, to include their shares in registration statements that we may file for ourselves or other stockholders. All shares of common stock that we may issue 69Table of Contents under our equity compensation plans can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and lock-upagreements that extend until either July 24, 2012 or January 20, 2013. Item 1B. Unresolved Staff Comments None. Item 2. Properties We occupy approximately 7,484 square feet of office and laboratory space in Cambridge, Massachusetts under a lease that expires inOctober 2014. We believe that our facility is sufficient to meet our current needs and that suitable additional space will be available as and when needed. Item 3. Legal Proceedings None. Item 4. Mine Safety Disclosures None. 70Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities MARKET INFORMATION Our common stock has been publicly traded on the NASDAQ Global Market under the symbol “VSTM” since January 27, 2012. Prior to that time,there was no public market for our common stock. As a result, we have not set forth quarterly information with respect to the high and low prices for ourcommon stock for the two most recent fiscal years. HOLDERS As of March 15, 2012, there were 55 holders of record of our common stock. This number does not include beneficial owners whose shares are heldby nominees in street name. DIVIDENDS We have never declared or paid cash dividends on our common stock, and we do not expect to pay any cash dividends on our common stock in theforeseeable future. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table contains information about our equity compensation plans as of December 31, 2011. Plan categoryNumber of securitiesto be issued uponexercise ofoutstanding stockoptions, warrants andrightsWeighted-average exerciseprice ofoutstandingoptions,warrants andrightsNumber of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column(a))Equity compensation plans approvedby security holders (1)405,141$0.7530,101Equity compensation plans notapproved by security holders———Total405,141$0.7530,101 (1) Includes information regarding our 2010 equity incentive plan. 71Table of Contents RECENT SALES OF UNREGISTERED SECURITIES Set forth below is information regarding securities sold by us during 2011 that were not registered under the Securities Act of 1933, as amended, or theSecurities Act. Also included is the consideration, if any, received by us for the securities and information relating to the section of the Securities Act, or rule ofthe Securities and Exchange Commission, under which exemption from registration was claimed. Issuances of securities In April 2011 we sold an aggregate of 12,000,000 shares of our series A preferred stock at a price per share of $1.00 for an aggregate purchase price of$12 million. In April 2011, we sold an aggregate of 256,000 shares of our common stock at a price per share of $0.28 for an aggregate purchase price of $71,680. In July 2011, we sold an aggregate of 16,025,000 shares of our series B preferred stock at a price per share of $2.00 for an aggregate purchase price of$32.1 million. In November 2011, we sold an aggregate of 9,067,825 shares of our series C preferred stock at a price per share of $2.25 for an aggregate purchase price of$20.4 million. In November 2011, we agreed to issue a warrant for the purchase of 142,857 shares of our common stock with an exercise price equal to the average closingprice of our common stock during the five days preceding the date of issuance to Poniard Pharmaceuticals, Inc. upon achievement of a milestone. No underwriters were involved in the foregoing sales of securities. The securities were issued to investors in reliance upon the exemption from the registrationrequirements of the Securities Act, as set forth in Section 4(2) under the Securities Act, including in some cases, Regulation D promulgated thereunder, relativeto transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. All purchasers of shares ofpreferred stock described above represented to us in connection with their purchase that they were accredited investors and were acquiring the shares for theirown account for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof. The purchasers received writtendisclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or anavailable exemption from such registration. Each share of our preferred stock converted into approximately 0.29 shares of our common stock upon the closingof our initial public offering on February 1, 2012. Stock option and other equity awards During 2011, we issued to certain employees, directors and consultants options to purchase an aggregate of 227,998 shares of common stock at a weighted-average exercise price of $1.12 per share. We also agreed to grant restricted stock units for an aggregate of 600,000 shares of our common stock, effective uponthe closing of our initial public offering. 72Table of Contents The issuance of stock options and the common stock issuable upon the exercise of such options, and the grant of restricted stock units and the issuance ofcommon stock issuable upon vesting of such restricted stock units, were issued pursuant to written compensatory plans or arrangements with our employees,directors and consultants, in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 701 promulgated under theSecurities Act or the exemption set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder relative to transactions by an issuernot involving any public offering. All recipients either received adequate information about us or had access, through employment or other relationships, tosuch information. PURCHASE OF EQUITY SECURITIES We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K. USE OF PROCEEDS FROM REGISTERED SECURITIES In February 2012, we completed an initial public offering of 6,325,000 shares of our common stock at a price of $10.00 per share for an aggregateoffering price of $63.3 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to a registration statementon Form S-1 (File No. 333-177677), which was declared effective by the SEC on January 26, 2012, and a registration statement on Form S-1 (File No. 333-179910) filed pursuant to Rule 462(b) of the Securities Act. UBS Securities LLC and Leerink Swann LLC acted as joint book-running managers of theoffering and as representatives of the underwriters. Lazard Capital Markets LLC, Oppenheimer & Co. Inc. and Rodman & Renshaw, LLC acted as co-managers for the offering. The offering commenced on January 27, 2012 and did not terminate until the sale of all of the shares offered. We received net proceeds from the offering of approximately $56.7 million, after deducting approximately $4.4 million in underwriting discountsand commissions and approximately $2.1 million in estimated offering expenses. None of the underwriting discounts and commissions or other offeringexpenses were incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to anyaffiliates of ours. As of March 15, 2012, we have used approximately $4.3 million of the net proceeds primarily to fund the preclinical development of VS-507, VS-4718and VS-5095, to advance and expand the research and preclinical development of additional product candidates and companion diagnostics and for workingcapital, capital expenditures and other general corporate purposes. We have not used any of the net proceeds from the offering to make payments, directly orindirectly, to any director or officer of ours, or any of their associates, to any person owning 10 percent or more of our common stock or to any affiliate ofours. We have invested the balance of the net proceeds from the offering in a variety of capital preservation investments, including short-term, investmentgrade, interest bearing instruments and U.S. government securities. There has been no material change in our planned use of the balance of the net proceedsfrom the offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act. Item 6. Selected Financial Data You should read the following selected financial data together with our financial statements and the related notes appearing elsewhere in this AnnualReport on Form 10-K and the “Management’s discussion and analysis of financial condition and results of operations” section of this Annual Report onForm 10-K. We have derived the statements of operations data for the year ended December 31, 2011, for the period from August 4, 2010 (inception) toDecember 31, 2010 and for the period from August 4, 2010 (inception) to December 31, 73Table of Contents 2011 and the balance sheet data as of December 31, 2011 and December 31, 2010 from our audited financial statements included in this Annual Report onForm 10-K. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period. Statement of operations data:Year endedDecember 31, 2011Period fromAugust 4, 2010(inception) toDecember 31, 2010Period fromAugust 4, 2010(inception) toDecember 31, 2011(in thousands, except per share data)Operating expenses:Research and development$9,883$400$10,283General and administrative3,8153844,199Total operating expenses13,69878414,482Loss from operations(13,698)(784)(14,482)Interest income15—15Net loss$(13,683)$(784)$(14,467)Accretion of preferred stock(32)(2)(34)Net loss applicable to common stockholders$(13,715)$(786)$(14,501)Net loss per share applicable to common stockholders—basic and diluted$(10.59)$(0.91)$(12.39)Weighted-average number of common shares used in net loss per shareapplicable to common stockholders—basic and diluted1,2958501,171 December 31,Balance sheet data:20112010(in thousands)Cash, cash equivalents and investments$56,805$3,584Working capital44,7953,228Total assets59,0373,604Redeemable convertible preferred stock68,1413,923Deficit accumulated during the development stage(14,467)(784)Total stockholders’ deficit(12,766)(687) 74Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements andrelated notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forthelsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing,includes forward-looking statements that involve risks and uncertainties. You should read the “Risk factors” section of this Annual Report onForm 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by theforward-looking statements contained in the following discussion and analysis. OVERVIEW We are a biopharmaceutical company focused on discovering and developing proprietary small molecule drugs targeting cancer stem cells in breast and othercancers along with proprietary companion diagnostics. A cancer stem cell is a particularly aggressive type of tumor cell, resistant to conventional cancertherapy, that we believe is an underlying cause of tumor recurrence and metastasis. Our scientific co-founders, Robert Weinberg, Ph.D., Eric Lander, Ph.D.,and Piyush Gupta, Ph.D., have made discoveries that link the epithelial-to-mesenchymal transition, or EMT, to the emergence of cancer stem cells. Thistransition involves the transformation of one type of cancer cell into a more aggressive and drug resistant type of cancer cell. Building on these discoveries, ourscientific co-founders developed proprietary technology to create a stable population of cancer stem cells that we use to screen for and identify small moleculecompounds that target cancer stem cells. We expect to initiate clinical trials with VS-507 and one of either VS-4718 or VS-5095 over the next 12 to 15months. We commenced active operations in the second half of 2010. Our operations to date have been limited to organizing and staffing our company, businessplanning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical studies of our mostadvanced product candidates. To date, we have not generated any revenues and have financed our operations with net proceeds from the private placement ofour preferred stock and our initial public offering. As of December 31, 2011, we had a deficit accumulated during the development stage of $14.5 million. Our net loss was $13.7 million for the year endedDecember 31, 2011, $784,000 for the period from August 4, 2010 (inception) to December 31, 2010 and $14.5 million for the period from August 4, 2010(inception) to December 31, 2011. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses toincrease in connection with our ongoing activities, particularly as we continue the research and development and later initiate clinical trials of, and seekmarketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significantcommercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associatedwith operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Adequateadditional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would beforced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will need to generate significantrevenues to achieve profitability, and we may never do so. 75Table of Contents FINANCIAL OPERATIONS OVERVIEW Revenue To date, we have not generated any revenues. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will dependheavily on the successful development and eventual commercialization of our product candidates. Research and development expenses Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts, and the development of ourtherapeutic product candidates and companion diagnostics. Our research and development expenses consist of: · employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; · external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs,manufacturing organizations and consultants, including our scientific advisory board; · license fees; and · facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation ofleasehold improvements and equipment, and laboratory and other supplies. We expense research and development costs to operations as incurred. We account for nonrefundable advance payments for goods and services that will beused in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when thepayment is made. We use our employee and infrastructure resources across multiple research and development projects. We do not allocate employee-related expenses ordepreciation to any particular project. Because all of our development projects are in preclinical development, we do not track research and development costsby project. The components of our research and development costs are described in more detail in “—Results of operations.” We expect to begin to trackspecific project costs when product candidates enter toxicology studies to enable the filing of an IND with the FDA. We anticipate that our research and development expenses will increase significantly in future periods as we increase the scope and rate of our drug discoveryefforts and begin costlier development activities, including clinical trials for our current and additional product candidates in the future. Our most advanced product candidates are VS-507, VS-4718 and VS-5095. We are currently evaluating these compounds in preclinical studies as potentialtherapies for breast and other cancers. We initiated IND-enabling toxicology studies for VS-507 in January 2012. Assuming successful completion ofpreclinical studies, we expect to initiate clinical trials with VS-507 and one of either VS-4718 or VS-5095 over the next 12 to 15 months.preclinical studies, we expect to initiate clinical trials with VS-507 and one of either VS-4718 or VS-5095 over the next 12 to 15 months. The successful development of our product candidates is highly uncertain. As this time, we cannot reasonably estimate or know the nature, timing andestimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material net cash inflowsfrom our product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertaintyof: 76Table of Contents · the scope, rate of progress and expense of our drug discovery efforts and other research and development activities; · the potential benefits of our product candidates over other therapies; · our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in thefuture; · clinical trial results; · the terms and timing of regulatory approvals; and · the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs andtiming associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinicaltrials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experiencesignificant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion ofclinical development. General and administrative expenses General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense, in ourexecutive, finance and business development functions. Other general and administrative expenses include allocated facility costs and professional fees forlegal, patent, investor and public relations, consulting and accounting services. We anticipate that our general and administrative expenses will increase in future periods to support increases in our research and development activities and asa result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated withbeing a public company and increased insurance premiums, among other factors. Interest income Prior to September 30, 2011, our cash and cash equivalents were invested in non-interest-bearing accounts. As a result, we only earned interest during the lastthree months of 2011. We expect interest income to increase in future periods as we invest the proceeds from our preferred stock financings and initial publicoffering. Accretion of preferred stock Prior to the conversion of our preferred stock into 11,740,794 shares of common stock upon the closing of our initial public offering in February 2012, ourpreferred stock was redeemable beginning in 2016 at its original issue price plus any declared but unpaid dividends upon a specified vote of the preferredstockholders. Accretion of preferred stock reflects the periodic accretion of issuance costs on our preferred stock to its redemption value. 77Table of Contents CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have preparedin accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On anongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation described in greater detailbelow. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under thecircumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K. However, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition andresults of operations. Accrued research and development expenses As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations andcontracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for theservice when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears forservices performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financialstatements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers andmake adjustments if necessary. The significant estimates in our accrued research and development expenses include fees paid to CROs in connection withresearch and development activities for which we have not yet been invoiced. We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conductresearch and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result inuneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepaymentof the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to beexpended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaidaccordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing ofservices performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too lowin any particular period. Stock-based compensation Prior to becoming a public company, we utilized significant estimates and assumptions in determining the fair value of our common stock. We granted stockoptions at exercise prices not less than the fair market value of our common stock as determined by the board of directors, with input from management. Theboard of directors determined the estimated fair value of our common stock based on a number of objective and subjective factors, including external marketconditions affecting the biotechnology industry sector and the prices at which we sold 78Table of Contents shares of redeemable convertible preferred stock, the superior rights and preferences of securities senior to our common stock at the time and the likelihood ofachieving a liquidity event, such as an initial public offering or sale of our company. We utilized various valuation methodologies in accordance with the framework of the 2004 American Institute of Certified Public Accountants TechnicalPractice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common stock. Themethodologies included an asset-based approach and the current value method for our initial common stock valuation as of November 30, 2010, the optionpricing method utilizing the reverse backsolve method to estimate our underlying equity value as of July 31, 2011 and a methodology that determined anestimated value under an initial public offering scenario and a sale scenario based upon an assessment of the probability of occurrence of each scenario as ofSeptember 30, 2011, November 17, 2011, and December 31, 2011. Each valuation methodology included estimates and assumptions that required ourjudgment. These estimates included assumptions regarding future performance, including the successful completion of preclinical studies and clinical trialsand the time to completing an initial public offering or sale. Significant changes to the key assumptions used in the valuations could have resulted in differentfair values of common stock at each valuation date. RESULTS OF OPERATIONS We were incorporated on August 4, 2010. As a result, our results of operations reflect the year ended December 31, 2011 and the period from August 4, 2010(inception) to December 31, 2010. There is no comparable period for 2010. Discussion of the year ended December 31, 2011 Research and development expenses. Research and development expenses were $9.9 million for the year ended December 31, 2011. Expenses during theyear included: · Contract research organization expenses of $3.7 million, representing 37% of total research and development expenses during the year, comprised ofexpenses for outsourced biology, chemistry and development services. · Payroll expense of $1.5 million, representing 15% of total research and development expenses during the year, including salaries, payroll taxes andbenefits for our employees in research and development. We had 11 employees in research and development at December 31, 2011. Payroll expense alsoincluded stock-based compensation expense for employees of $30,000. · Consulting fees of $1.3 million, representing 13% of total research and development expenses during the year, including $476,000 for our scientificadvisory board, $232,000 for recruitment consultants and $143,000 for database consultants. · Laboratory supply expense of $1.0 million, representing 11% of total research and development expenses during the year. · Non-employee stock-based compensation expense of $1.0 million, representing 10% of total research and development expenses during the year, related tostock options and restricted stock awarded to members of our scientific advisory board. 79Table of Contents · License fee expense of $842,000, representing 9% of total research and development expense during the year, comprised of upfront and annual licensefees, including $406,000 for the obligation to issue a warrant for the purchase of 142,857 shares of our common stock to Poniard Pharmaceuticals, Inc. · Occupancy expense of $465,000, representing 5% of total research and development expenses during the year, which is an allocated portion of rent andother occupancy costs. General and administrative expenses. General and administrative expenses were $3.8 million for the year ended December 31, 2011. Expenses during theyear included: · Payroll expense of $1.4 million, representing 38% of total general and administrative expenses during the year, including salaries, payroll taxes andbenefits for our general and administrative employees. Payroll expense included stock-based compensation expense for employees of $62,000. · Consulting fees of $696,000, representing 18% of total general and administrative expenses during the year, including business development, publicrelations and finance consultants. · Professional fee expense of $666,000, representing 18% of total general and administrative expenses during the year, comprised of fees for audit, tax andlegal services, including the reimbursement to the Whitehead Institute of patent costs related to our licenses with the Whitehead Institute. · Non-employee stock-based compensation expense of $592,000, representing 16% of total general and administrative expenses during the year, related torestricted stock awarded to our co-founders. · Occupancy expense of $207,000, representing 5% of total general and administrative expenses during the year, which is an allocated portion of rent andother occupancy costs. · Travel expense of $190,000, representing 5% of total general and administrative expenses during the year, including travel, meals, entertainment andconferences. Interest income. We recorded $15,000 of interest income in the year ended December 31, 2011 associated with our cash equivalents and investments. Accretion of preferred stock. We recorded $32,000 of accretion in the year ended December 31, 2011 reflecting the periodic accretion of issuance costsassociated with our series A, series B and series C preferred stock. Discussion of the period from August 4, 2010 (inception) to December 31, 2010 Research and development expenses. Research and development expenses were $400,000 for the period from August 4, 2010 (inception) to December 31,2010. Expenses during the period included: · License fee expense of $182,000, representing 46% of total research and development expenses during the period, comprised of fees for our exclusive andnon-exclusive licenses, as well as the fair value of common stock that we issued to the Whitehead Institute in connection with our drug discovery platformlicense agreement. · Consulting fees of $137,000, representing 34% of total research and development expenses during the period, primarily for our scientific advisory board. 80Table of Contents · Contract research organization expenses of $42,000, representing 11% of total research and development expenses during the period, including expensesfor outsourced biology and chemistry. · Non-employee stock-based compensation expense of $24,000, representing 6% of total research and development expenses during the period, related tostock options and restricted stock awarded to members of our scientific advisory board. · Laboratory supply expense of $13,000, representing 3% of total research and development expenses during the period. General and administrative expenses. General and administrative expenses were $384,000 for the period from August 4, 2010 (inception) to December 31,2010. Expenses during the period included: · Professional fee expense of $182,000, representing 48% of total general and administrative expenses during the period, comprised of fees for audit, taxand legal services, including the reimbursement to the Whitehead Institute of patent costs related to our drug discovery platform license agreement. · Payroll expense of $96,000, representing 25% of total general and administrative expenses during the period, including salaries, payroll taxes andbenefits for our general and administrative employees. Stock-based compensation expense was not material to the financial statements. · Occupancy expense of $36,000, representing 9% of total general and administrative expenses during the period, which is an allocated portion of rent andother occupancy costs. · Non-employee stock-based compensation expense of $28,000, representing 7% of total general and administrative expenses during the period, related torestricted stock awarded to our co-founders. · Consulting fees of $26,000, representing 7% of total general and administrative expenses during the period, including business development, publicrelations and information technology consultants. · Travel expense of $16,000, representing 4% of total general and administrative expenses during the period, including travel, meals, entertainment andconferences. Accretion of preferred stock. We recorded $2,000 of accretion in the period from August 4, 2010 (inception) to December 31, 2010 reflecting the periodicaccretion of issuance costs associated with our series A preferred stock. LIQUIDITY AND CAPITAL RESOURCES Sources of liquidity To date, we have not generated any revenues. We have financed our operations to date through private placements of our preferred stock and our initial publicoffering, which we completed in February 2012. As of December 31, 2011, we had received $68.1 million in net proceeds from the issuance of preferredstock. As of December 31, 2011, we had $21.0 million in cash and cash equivalents, $26.9 million in short-term investments and $9.0 million in long-terminvestments. In February 2012, we received $56.7 million in net proceeds from our initial public offering. We primarily invest our cash, cash equivalentsand investments in a U.S. Treasury money market fund, U.S. agency notes and corporate bonds. 81Table of Contents Cash flows The following table sets forth the primary sources and uses of cash for each of the periods set forth below. (in thousands)Year endedDecember 31, 2011Period fromAugust 4, 2010(inception) toDecember 31, 2010Net cash used in operating activities$(10,132)$(330)Net cash used in investing activities(36,722)(8)Net cash provided by financing activities64,2243,922Net increase in cash and cash equivalents$17,370$3,584 Operating activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and favorable changes in thecomponents of working capital. The significant increase in cash used in operating activities for the year ended December 31, 2011 compared to the period fromAugust 4, 2010 (inception) to December 31, 2010 is due to an increase in research and development expenses as we increased our research and developmentheadcount, increased spending on external research and development costs and increases in the balance of accounts payable, accrued expenses and deferredrent. In addition, we commenced operations in August 2010 and, as such, the period ended December 31, 2010 reflects only five months of activity. We expectcash used in operating activities to continue to increase for the foreseeable future as we fund our increased research and development activities. Investing activities. The cash used in investing activities for all periods reflects the purchases of property and equipment. The majority of such purchases inthe year ended December 31, 2011 were for laboratory equipment. In addition, during the year ended December 31, 2011, investing activities included $35.9million used to purchase investments and an $86,000 increase in restricted cash related to a standby letter of credit issued as a security deposit for our facilitylease. Financing activities. The cash provided by financing activities in the year ended December 31, 2011 is the result of the sale and issuance of 12,000,000shares of our series A preferred stock for net proceeds of $12.0 million, the sale and issuance of 16,025,000 shares of our series B preferred stock for netproceeds of $31.9 million, the sale and issuance of 9,067,825 shares of our series C preferred stock for net proceeds of $20.2 million and $38,000 of netproceeds from the sale of restricted stock to employees. The cash provided by financing activities in the period from August 4, 2010 (inception) toproceeds from the sale of restricted stock to employees. The cash provided by financing activities in the period from August 4, 2010 (inception) toDecember 31, 2010 is primarily the result of the sale and issuance of 4,000,000 shares of our series A preferred stock for net proceeds of $3.9 million. Funding requirements All of our product candidates are still in preclinical development. We expect to continue to incur significant expenses and increasing operating losses for theforeseeable future. We anticipate that our expenses will increase substantially if and as we: · continue our research and preclinical development of our product candidates; · seek to identify additional product candidates that target cancer stem cells; · acquire or in-license other products and technologies; 82Table of Contents · initiate clinical trials for our product candidates; · seek marketing approvals for our product candidates that successfully complete clinical trials; · ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; · maintain, expand and protect our intellectual property portfolio; · hire additional clinical, quality control and scientific personnel; and · add operational, financial and management information systems and personnel, including personnel to support our product development and plannedfuture commercialization efforts. We expect that the net proceeds from our initial public offering in February 2012, together with our existing cash, cash equivalents and investments, willenable us to fund our current operating plan and capital expenditure requirements into 2016. We have based this estimate on assumptions that may prove to bewrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with thedevelopment and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development andcommercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated withcompleting the development of our current product candidates. Our future capital requirements will depend on many factors, including: · the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for our product candidates; · the extent to which we acquire or in-license other products and technologies; · the costs, timing and outcome of regulatory review of our product candidates; · the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidatesfor which we receive marketing approval; · revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; · the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectualproperty-related claims; and · our ability to establish collaborations on favorable terms, if at all. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debtfinancings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raiseadditional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms ofthese securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, mayinvolve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional 83Table of Contents debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangementswith third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grantlicenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may berequired to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market productcandidates that we would otherwise prefer to develop and market ourselves. CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table summarizes our contractual obligations at December 31, 2011. (in thousands)TotalLess than1 year1-3 years3-5yearsMorethan 5yearsOperating lease obligations$1,018$351$667——License agreements(1)————— (1) As discussed in Note 10 to the financial statements appearing elsewhere in this Annual Report on Form 10-K, we have executed several agreements tolicense intellectual property. The license agreements require us to pay upfront license fees and ongoing annual license maintenance fees, totaling aminimum of $95,000 per year beginning in 2012 up to a maximum amount of $155,000 per year beginning in 2015, as well as reimburse certainpatent costs previously incurred by the licensors, as applicable. We have not included maintenance fees in the table above since the minimum annualpayments are perpetual and the agreements are cancelable by us at any time upon 90 days’ prior written notice to the licensor. Under our drug discovery platform license agreement, which we amended and restated in January 2012, we also have agreed to make milestone payments tothe Whitehead Institute upon achieving various development, regulatory and commercialization milestones. For each licensed product, we agreed to makemilestone payments of up to an aggregate of $1,560,000 plus an additional amount for each subsequent approval of additional indications for a maximumnumber of licensed products. For each identified product that is not a licensed product, we agreed to make milestone payments of up to an aggregate of$815,000 plus an additional amount for each subsequent approval of additional indications for a maximum number of identified products. Each type ofspecified milestone payment is payable only for each of the maximum number of licensed products and the maximum number of identified products, as thecase may be, to achieve the applicable milestone. In addition, a separate milestone payment is due upon the first commercial sale of each licensed product oridentified product that is a diagnostic or prognostic test. A single additional milestone payment is due for the first issuance of licensed patent rights in theUnited States, the United Kingdom, France, Germany, Spain or Italy. In addition, we have agreed to pay the Whitehead Institute royalties as a percentage ofnet sales of licensed products. The royalty rate is in the low single digits as a percentage of net sales for licensed products that are therapeutics, the mid singledigits for licensed products that are diagnostics or prognostics and less than one percent for identified products. Under our license agreement with Poniard Pharmaceuticals, Inc., or Poniard, that we entered into in November 2011 relating to VS-4718 and VS-5095 andother compounds covered by a licensed patent right under that agreement that have the inhibition of Focal Adhesion Kinase as a primary mode of action, wepaid an upfront license fee and agreed to pay Poniard milestone payments of up to an aggregate of $13,250,000 upon the achievement of specified developmentand regulatory milestones. We also agreed to issue to Poniard a warrant 84Table of Contents to purchase 142,857 shares of our common stock upon the first dosing of the first patient in our first Phase 1 clinical trial of a licensed product. The exerciseprice of such warrant would be equal to the average closing price of our common stock during the five trading days preceding such issue date. In addition, weagreed to pay low to mid single digit royalties to Poniard as a percentage of net sales of licensed products. Under our separate exclusive license agreement with the Whitehead Institute, or the cancer diagnostic license agreement, which we amended and restated inDecember 2011, we paid an upfront license fee and agreed to make milestone payments of up to an aggregate of $825,000 to the Whitehead Institute uponachieving specified regulatory and commercialization milestones. In addition, we have agreed to pay the Whitehead Institute royalties as a percentage of netsales of licensed products. The royalty rate is in the mid single digits as a percentage of net sales. OFF-BALANCE SHEET ARRANGEMENTS We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and ExchangeCommission rules. TAX LOSS CARRYFORWARDS As of December 31, 2011, we had federal net operating loss carryforwards of $11.6 million and state net operating loss carryforwards of $11.9 million ,which are available to reduce future taxable income. We also had federal tax credits of $358,000 and state tax credits of $42,000, which may be used to offsetfuture tax liabilities. The net operating loss and tax credit carryforwards will expire at various dates through 2031. Net operating loss and tax creditcarryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annuallimitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as definedunder Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can be utilizedannually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediatelyprior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. At December 31, 2011, we recorded a 100%valuation allowance against our net operating loss and tax credit carryforwards of approximately $5.2 million, as we believe it is more likely than not that thevaluation allowance against our net operating loss and tax credit carryforwards of approximately $5.2 million, as we believe it is more likely than not that thetax benefits will not be fully realized. In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will berealized, net income would increase in the period of determination. RECENTLY ADOPTED ACCOUNTING STANDARDS We have not recently adopted any new accounting standards. In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement.” This ASU clarifies the concepts related to highest and best use and valuationpremise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instrumentsclassified as a component of stockholders’ deficit. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements,the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU areeffective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. We do not expect theadoption of these provisions to have a significant impact on our financial statements. 85Table of Contents In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income.” This ASU intends to enhance comparability and transparency of othercomprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and thecomponents of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option topresent other comprehensive income components as part of the statement of changes in shareholder’s deficit. The provisions of this ASU will be appliedretrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. We do not expect the adoption of theseprovisions to have a significant impact on our financial statements , but it will impact the manner in which we present comprehensive income (loss). Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk related to changes in interest rates. We had cash and cash equivalents of $3.6 million as of December 31, 2010. We had cash,cash equivalents and investments of $56.8 million as of December 31, 2011, consisting of cash, money market funds, corporate debt securities and UnitedStates Treasuries and agencies. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S.interest rates, particularly because most of our investments are in short-term securities. Our available for sale securities are subject to interest rate risk and willfall in value if market interest rates increase. Due to the short-term duration most of our investment portfolio and the low risk profile of our investments, animmediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio. We contract with CROs and contract manufacturers globally. We may be subject to fluctuations in foreign currency rates in connection with these agreements.Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. As ofDecember 31, 2011, approximately $7,000 of our total liabilities was denominated in currencies other than the functional currency. As of December 31, 2010,all of our liabilities were denominated in our functional currency. Item 8. Financial Statements and Supplementary Data Our financial statements, together with the report of our independent registered public accounting firm, appear on pages F-1 through F-27 of this AnnualReport on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Operating Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of December 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in thereports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rulesand forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to bedisclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Managementrecognizes that any controls and procedures, no matter how well designed and operated, can provide only 86Table of Contents reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2011, our Chief Executive Officer and ChiefOperating Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Annual Report on Internal Control Over Financial Reporting This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or anattestation report of the company’s independent registered public accounting firm due to a transition period established by rules of the Securities and ExchangeCommission for newly public companies. Changes in Internal Control Over Financial Reporting No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2011 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information On March 28, 2012, we entered into an employment agreement with Paul Brannelly, one of our named executive officers for the year ended December31, 2011 and our current Vice President of Finance. The terms of the employment agreement are described in “Executive Compensation” in Item 5 of thisAnnual Report on Form 10-K. 87Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance Directors and Executive Officers The following table sets forth the name, age and position of each of our directors and executive officers as of March 15, 2012. NameAgePositionChristoph Westphal, M.D., Ph.D.(2)43President, Chief Executive Officer and DirectorRobert Forrester48Chief Operating OfficerJonathan Pachter, Ph.D.54Vice President, Head of ResearchRichard Aldrich(2)(3)57DirectorJohn K. Clarke(1)58DirectorAnsbert Gadicke, M.D.(2)54DirectorStephen Kraus(1)(3)35DirectorHenri Termeer(1)(3)66Director (1) Member of the audit committee. (2) Member of the nominating and corporate governance committee. (3) Member of the compensation committee. Christoph Westphal, M.D., Ph.D. has served as our President and Chief Executive Officer since September 2011. He has served on our board of directorssince August 2010 and as the Chairman of our board of directors since March 2011. Dr. Westphal has served as a partner of Longwood Fund, LP, a venturecapital investment fund, since 2010. He served as the President of SR One, the corporate venture capital arm of GlaxoSmithKline, from 2010 until 2011.Dr. Westphal has previously been involved in founding a number of biotechnology companies as chief executive officer. Dr. Westphal co-founded SirtrisPharmaceuticals, Inc., which was acquired by GlaxoSmithKline plc in 2008, and served as its Chief Executive Officer from 2004 to 2010. He also co-foundedAlnara Pharmaceuticals, Inc., Acceleron Pharma, Inc., serving as its Chief Executive Officer in 2003, Alnylam Pharmaceuticals, Inc., serving as its ChiefExecutive Officer in 2002, and Momenta Pharmaceuticals, Inc., serving as its Chief Executive Officer in 2001. Dr. Westphal serves on the Board of Fellows ofHarvard Medical School and the Board of Overseers for the Boston Symphony Orchestra and is a member of the Research Advisory Council at theMassachusetts General Hospital. He earned his M.D. from Harvard Medical School, his Ph.D. in genetics from Harvard University and his B.A. fromColumbia University. We believe that Dr. Westphal is qualified to serve on our board of directors due to his experience in the life sciences industry as anentrepreneur and venture capitalist and his service on the boards of directors of other life sciences companies. Robert Forrester has served as our Chief Operating Officer since March 2011. Mr. Forrester has previously held executive level positions at both private andpublic life sciences companies. Prior to joining us, Mr. Forrester served as Chief Operating Officer of Forma Therapeutics, Inc. from 2010 until 2011.Previously he served as Interim President and Chief Executive Officer of CombinatoRx, Inc., now Zalicus Inc., from 2009 until 2010 and as its Executive VicePresident and Chief Financial Officer from 2004 to 2009. Mr. Forrester 88Table of Contents served as Senior Vice President, Finance and Corporate Development at Coley Pharmaceuticals Group, Inc. from 2000 to 2003. He earned his LL.B. fromBristol University in England. Jonathan Pachter, Ph.D. has served as our Vice President, Head of Research since July 2011. Prior to joining us, Dr. Pachter served as the Senior Director ofCancer Biology at OSI Pharmaceuticals, Inc., which was acquired by Astellas Pharma Inc. in 2010, from 2005 to 2011. He earned his Ph.D. in Neuroscienceand his M.S. in Pharmacology from Baylor College of Medicine. Richard Aldrich has served as a member of our board of directors since August 2010. Mr. Aldrich has served as a partner of Longwood Fund, LP, a venturecapital investment fund, since 2010. He founded RA Capital Management LLC, a hedge fund, in 2004 and served as a Managing Member from 2004 to 2008and as a Co-Founding Member from 2008 until 2011. He co-founded Sirtris Pharmaceuticals, Inc., which was acquired by GlaxoSmithKline plc in 2008, andserved on its board of directors from 2004 to 2008; co-founded Concert Pharmaceuticals, Inc. and has served as chairman of its board of directors since 2006;and co-founded Alnara Pharmaceuticals, Inc. and served on its board of directors from 2008 to 2010. Mr. Aldrich also joined Vertex Pharmaceuticals, Inc. atits founding in 1989 and served as its Senior Vice President and Chief Business Officer until 2001. He earned his M.B.A from the Amos Tuck School atDartmouth College and his B.S. from Boston College. We believe that Mr. Aldrich is qualified to serve on our board of directors due to his experience in the lifesciences industry as an entrepreneur and venture capitalist and his service on the boards of directors of other life sciences companies. John K. Clarke has served as a member of our board of directors since November 2010. Mr. Clarke co-founded Cardinal Partners, a venture capital firm, andhas served as its Managing General Partner since 1997. Mr. Clarke co-founded Alnylam Pharmaceuticals, Inc. and has served on its board of directors since2002. He also serves on the board of directors of Momenta Pharmaceuticals, Inc. Mr. Clarke also co-founded and has served as chief executive officer for anumber of other companies, including Alkermes, Inc., Arris Pharmaceuticals, Inc., Cubist Pharmaceuticals, Inc. and the DNX Corporation. He earned hisM.B.A. from the Wharton School of the University of Pennsylvania and his B.A. in Biology and Economics from Harvard College. We believe thatMr. Clarke is qualified to serve on our board of directors due to his financial expertise, years of experience providing advisory services to organizations in thelife sciences industry and his service on the boards of directors of other life sciences companies. Ansbert Gadicke, M.D. has served as a member of our board of directors since November 2010. Dr. Gadicke co-founded MPM Group, a venture capitalfirm, and has served as the managing director of MPM Asset Management LLC since 1996. He serves on the board of directors of Radius Health, Inc. and anumber of privately-held life sciences companies. Dr. Gadicke previously served as a member of the board of directors of Pharmasset, Inc. from 1999 until2007 and as a member of the board of directors of PharmAthene, Inc. from 2004 until 2007. Dr. Gadicke also serves on the Board of Fellows of HarvardMedical School. He earned his M.D. from J.W. Goethe University in Frankfurt. We believe that Dr. Gadicke is qualified to serve on our board of directors dueto his experience in the life sciences industry as a venture capitalist, his training as a physician and his service on the boards of directors of other life sciencescompanies. Stephen Kraus has served as a member of our board of directors since November 2010. Mr. Kraus has served as an investment professional at BessemerVenture Partners, a venture capital firm, since 2004 and has been employed as a Partner since 2010. He serves on the board of directors of a number ofprivately-held life sciences companies. He previously served as a member of the board of directors of Sirtris Pharmaceuticals, Inc. from 2005 until 2007 andas a member of the board of directors of Restore Medical, Inc. from 2005 until 2008. He earned his M.B.A. from Harvard Business School and his B.A. fromYale University. We believe that 89Table of Contents Mr. Kraus is qualified to serve on our board of directors due to his experience in the life sciences industry as a venture capitalist and his service on the boardsof directors of other life sciences companies. Henri Termeer has served as a member of our board of directors since June 2011. Mr. Termeer served as President and a member of the board of directors ofGenzyme Corporation from 1983 until its acquisition by sanofi-aventis U.S., LLC in 2011, its Chief Executive Officer from 1985 to 2011 and the chairmanof its board of directors from 1988 to 2011. He serves on the Council of Economic Advisors to Massachusetts Governor Deval Patrick and as co-chair of theLeadership Counsel of the Massachusetts Life Sciences Collaborative. Mr. Termeer is also chairman emeritus of the New England Healthcare Institute and atrustee for the Boston Museum of Science. Mr. Termeer serves on the board of directors of ABIOMED Inc., AVEO Pharmaceuticals, Inc., MassachusettsGeneral Hospital, the Massachusetts Institute of Technology Corporation and Partners HealthCare, and, until December 31, 2011, served as chairman of theboard of directors of the Federal Reserve Bank of Boston. Mr. Termeer also serves on the Board of Fellows of Harvard Medical School. He earned his M.B.A.from the Darden School at the University of Virginia. We believe Mr. Termeer is qualified to serve on our board of directors due to his senior executiveexperience in developing and managing Genzyme Corporation over the course of many years, his service on the boards of directors of Genzyme Corporationand other life sciences companies and his deep life sciences industry experience and knowledge. Family Relationships There are no family relationships among any of our directors or executive officers. Section 16(a) Beneficial Ownership Reporting Compliance Our directors, executive officers and beneficial owners of more than 10% of our common stock are required under Section 16(a) of the Securities Exchange Actof 1934, as amended, to file reports of ownership and changes in ownership of our securities with the SEC. We completed the initial public offering of ourcommon stock on February 1, 2012, and accordingly, we did not have a class of securities registered pursuant to Section 12 of the Exchange Act in 2011. Code of Business Conduct and Ethics We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer,principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the code is posted on the“Investors — Corporate Governance” section of our website, which is located at www.verastem.com. In addition, we intend to post on our website alldisclosures that are required by law, the rules of the SEC or NASDAQ stock market listing standards concerning any amendments to, or waivers from, anyprovision of the code. Board Committees Our board of directors has established an audit committee, a nominating and corporate governance committee and a compensation committee, each of whichoperates under a charter that has been approved by our board. Our board of directors has determined that all of the members of the audit committee, thecompensation committee and the nominating and corporate governance committee, other than Dr. Westphal, are independent as defined under NASDAQMarketplace Rules, including, in the case of all the members of our audit committee, the independence requirements contemplated by Rule 10A-3 under theSecurities Exchange Act of 1934. 90Table of Contents Audit committee The members of our audit committee are Mr. Clarke, Mr. Kraus and Mr. Termeer. Mr. Clarke chairs the audit committee. Our board of directors hasdetermined that Mr. Clarke is an “audit committee financial expert” as defined in applicable SEC rules. Nominating and corporate governance committee The members of our nominating and corporate governance committee are Mr. Aldrich, Dr. Gadicke, and Dr. Westphal. Mr. Aldrich chairs the nominating andcorporate governance committee. No changes have been made to the procedures by which our stockholders may recommend nominees to our board of directors. Compensation committee The members of our compensation committee are Mr. Termeer, Mr. Aldrich and Mr. Kraus. Mr. Termeer chairs the compensation committee. Item 11. Executive Compensation COMPENSATION DISCUSSION AND ANALYSIS Overview This section discusses the principles underlying our policies and decisions with respect to the compensation of our executive officers and what we believe arethe most important factors relevant to an analysis of these policies and decisions. This section also describes the material elements of compensation awardedto, earned by or paid to each of our named executive officers for 2011. Our “named executive officers” for 2011 consist of our three current executive officers,Christoph Westphal, M.D., Ph.D., our President and Chief Executive Officer, Robert Forrester, our Chief Operating Officer who also serves as our principalfinancial officer, and Jonathan Pachter, Ph.D., our Vice President, Head of Research; and three individuals who previously served as executives officers withus, Paul Brannelly, our current Vice President of Finance who served as our principal financial officer prior to the arrival of Mr. Forrester, Satish Jindal,Ph.D., our former President and Chief Operating Officer who remains with us as a non-executive employee, and Peter Elliott, Ph.D., our former Head ofResearch and Development. In addition, this section provides qualitative information regarding the manner and context in which compensation is awarded toand earned by our executive officers and is intended to provide context for the data presented in the tables and narrative that follow. We commenced operations in November 2010 and hired each of our current executive officers in 2011. Dr. Westphal, our President and Chief ExecutiveOfficer, does not currently receive, and has not historically received, any compensation from us for his service as President and Chief Executive Officerbecause of his service as a general partner of Longwood Fund, LP, a venture capital investment fund and one of our principal stockholders. Ourcompensation committee is currently evaluating potential compensation arrangements for Dr. Westphal designed to align Dr. Westphal’s interests with those ofour stockholders and provide Dr. Westphal with an incentive to remain in his position as our President and Chief Executive Officer. The compensation of eachof our other current executive officers is based on individual terms approved by our board of directors at the time of hire. Following our initial public offering,or IPO, in February 2012, our compensation committee 91Table of Contents began overseeing our compensation policies and, together with our board of directors, will periodically evaluate the need for revisions to ensure ourcompensation program is competitive with the companies with which we compete for executive talent. Objectives and philosophy of our executive compensation program The primary objectives of our executive compensation program are to: · attract, retain and motivate experienced and talented executives; · ensure executive compensation is aligned with our corporate strategies, research and development programs and business goals; · recognize the individual contributions of executives while fostering a shared commitment among executives by aligning their individual goals with ourcorporate goals; · promote the achievement of key strategic, development and operational performance measures by linking compensation to the achievement of measurablecorporate and individual performance goals; and · align the interests of our executives with our stockholders by rewarding performance that leads to the creation of stockholder value. Each of our named executive officers was hired by us before our board of directors established a formal executive compensation program. To achieve theseobjectives, our board of directors and compensation committee are evaluating our executive compensation program with the goal of setting and maintainingcompensation at levels that are justifiable based on each executive’s level of experience, performance and responsibility and that our board of directors andcompensation committee believe are competitive with those of other companies in our industry and our region that compete with us for executive talent. Inaddition, beginning in 2012 our executive compensation program will tie a substantial portion of each executive’s overall compensation to key strategic,financial and operational goals. We have provided, and expect to continue to provide, a portion of our executive compensation in the form of stock options,restricted stock and restricted stock units that vest over time, which we believe helps to retain our executives and aligns their interests with those of ourstockholders by allowing them to participate in the longer term success of our company as reflected in stock price appreciation. Use of compensation consultants and market benchmarking For purposes of determining total compensation and the primary components of compensation for our executive officers in 2011, we did not retain the servicesof a compensation consultant or use survey information or compensation data to engage in benchmarking. Beginning with 2012 compensation, ourcompensation committee is considering publicly available compensation data for national and regional companies in the biotechnology industry to help guideits executive compensation decisions at the time of hiring and for subsequent adjustments in compensation. In connection with designing our compensationprogram, our board of directors recently retained the services of Pearl Meyer & Partners, or Pearl Meyer, an independent compensation consultant, to provideadditional comparative data on executive compensation practices in our industry and to advise on our executive compensation program generally. Although weexpect that our board of directors and compensation committee will consider Pearl Meyer’s advice and recommendations about our 92Table of Contents executive compensation program, the board of directors and compensation committee will ultimately make their own decisions about these matters. We anticipate that Pearl Meyer will provide our board of directors and compensation committee with comparative data showing where our total compensationand each element of our compensation rate among both public and private companies in the biotechnology and life sciences industry generally and a peer groupof publicly-traded companies in the life science industry at a stage of development, market capitalization and size comparable to ours with which the board ofdirectors and compensation committee believe we compete for executive talent. We currently expect that the companies to be included in this peer group will be: Aegerion Pharmaceuticals, Inc.Alnylam Pharmaceuticals, Inc.Amicus Therapeutics, Inc.Anacor Pharmaceuticals, Inc.Anthera Pharmaceuticals, Inc.ARIAD Pharmaceuticals, Inc.Aveo Pharmaceuticals, Inc.Curis Inc.Cytokinetics, Inc.Endocyte, Inc.Infinity Pharmaceuticals, Inc.Ironwood Pharmaceuticals, Inc.Myrexis, Inc.Osiris Therapeutics, Inc.Synta Pharmaceuticals Corp.Zalicus Inc. This peer group is subject to change, and we anticipate that our board of directors and compensation committee will periodically review and update the list.The peer group will be used for purposes of gathering data to help develop our executive compensation practices and guide our compensation decisions. Wealso expect that Pearl Meyer will make suggestions about our executive compensation practices based on the data it provides to us as well as compensationtrends in our industry. We expect that the board of directors and compensation committee will consider peer group and other industry compensation data andthe recommendations of Pearl Meyer when making decisions related to executive compensation, with the goal of ensuring that our compensation levels arereasonably competitive relative to the compensation paid by companies in our peer group. Based in part on initial consultation with Pearl Meyer and review ofPearl Meyer’s analysis and recommendations, we generally expect that our board of directors and compensation committee will, in making futurecompensation decisions, target the total compensation paid to our executive officers between the 50th and 75th percentile of companies in our peer group. Annual compensation review process We conducted annual compensation reviews for the first time in December 2011. As part of the reviews, we addressed bonus awards for 2011, our first fullyear of operations, and for all aspects of compensation for 2012. In future years, we expect to evaluate each executive officer’s performance during the year inthe first quarter of the following year. We expect that our chief executive officer will evaluate each executive other than himself from his own perspective andbased on input from others within our company. This process will lead to a recommendation by the chief executive officer to the compensation committee withrespect to each executive officer, other than himself, as to: · the level of contributions made to the general management and guidance of the company; · the need for salary increases; 93 Table of Contents · the amount of bonuses to be paid, including the achievement of stated corporate and individual performance goals with respect to the annual review forperformance in 2012 and future years; and · whether or not equity incentive awards should be made. These recommendations will be reviewed by our compensation committee and taken into account when it makes a final determination on all such matters. Components of our executive compensation program The primary elements of our executive compensation program are: · base salary; · annual performance-based cash bonuses; · stock-based awards; · broad-based health and welfare benefits; and · severance and change in control benefits. We do not, and do not expect in the future to, have a formal or informal policy for allocating between long-term and short-term compensation, between cashand non-cash compensation or among the different forms of non-cash compensation. Instead, our board of directors, after reviewing data it considers relevant,has determined subjectively what it believes to be the appropriate level and mix of the various compensation components. Beginning with 2012, we expect thatour compensation committee also will consider information provided to it by Pearl Meyer in making this determination. Ultimately, the objective in allocatingbetween long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives tomaximize long-term value for our company and our stockholders. Therefore, we provide cash compensation in the form of base salary to meet competitivesalary norms and in the form of bonus compensation to incentivize and reward superior performance on an annual basis. To further focus our executives onlonger-term performance and the creation of stockholder value, we rely upon equity-based awards that vest over a meaningful period of time. In addition, weprovide our executives with benefits that are generally available to all our employees, including health and dental insurance, life and disability insurance and a401(k) plan. Finally, we offer our executives severance benefits to incentivize them to continue to achieve stockholder value in connection with change incontrol or other situations in which they could be terminated without cause. We have employment agreements with three of our named executive officers, Mr. Forrester, Dr. Pachter and Mr. Brannelly. These employment agreementsprovide for specific base salaries, target annual bonuses and severance and change in control arrangements for these executive officers. Dr. Pachter alsoreceived a signing bonus and reimbursement of certain relocation expenses in connection with the commencement of his employment. Details of theseemployment agreements are provided below under the heading “—Employment agreements.” 94Table of Contents Base salary We use base salaries to recognize the experience, skills, knowledge and responsibilities of our employees, including our executive officers. Base salaries for ournamed executive officers were established through arm’s-length negotiation at the time the executive was hired, taking into account the position for which theexecutive was considered and the executive’s qualifications, prior experience and prior salary. None of our named executive officers is currently party to anemployment agreement that provides for automatic or scheduled increases in base salary. However, we expect that our compensation committee will annuallyreview and evaluate, with input from our chief executive officer, the need for adjustment of the base salaries of our executives based on changes and expectedchanges in the scope of an executive’s responsibilities, including promotions, the individual contributions made by and performance of the executive duringthe prior year, the executive’s performance over a period of years, overall labor market conditions, the relative ease or difficulty of replacing the executive witha well-qualified person, our overall growth and development as a company, general salary trends in our industry and among our peer group and where theexecutive’s salary falls in the salary range presented by that data. In making decisions regarding salary increases, we may also draw upon the experience ofmembers of our board of directors with other companies. We do not expect that our executive officers will receive any formulaic base salary increase, but we doexpect that our compensation committee will, in making future compensation decisions, target the total cash compensation of our named executive officers,consisting of their base salaries and target annual cash bonuses, generally between the 50th and 75th percentile of companies in our peer group. Dr. Westphal does not currently receive, and has not historically received, a base salary from us. Dr. Westphal receives annual compensation in connectionwith his service on our board of directors, as further described under the heading “—Director compensation.” Mr. Forrester’s 2011 annual base salary was $310,000 pursuant to the terms of the employment agreement that we entered into with him upon thecommencement of his employment in March 2011. Dr. Pachter’s 2011 annual base salary was $280,000 pursuant to the terms of the employment agreementthat we entered into with him upon the commencement of his employment in July 2011. Our board of directors approved the base salaries of Mr. Forrester andDr. Pachter based on the recommendations of Dr. Westphal. In making his recommendations, Dr. Westphal considered the factors discussed above, includingthe qualifications, prior experience and prior salary of each of Mr. Forrester and Dr. Pachter. Our employment agreements with Mr. Forrester and Dr. Pachterwere amended and restated effective upon the closing of our IPO in February 2012. Mr. Brannelly’s 2011 base salary was $125,000 for the first eight months of 2011 when he was serving as our part-time employee and was increased to$250,000 in September 2011 when he began serving as our full-time employee. Dr. Jindal was paid $300,000 in total salary for 2011 as our former Presidentand Chief Operating Officer and in his current capacity as our non-executive employee pursuant to the terms of a transition services agreement we entered intowith him in February 2011, which provides a current annual base salary of $300,000 through mid-April 2012. Prior to his departure in August 2011,Dr. Elliott was paid $108,000 in total salary for 2011. As with our current executive officers, the base salary for each of these individuals was determined atthe time of hire based on the factors set forth above. For 2012, our board of directors determined to increase the base salaries for the named executive officers currently employed by us from 2011 levels based onour board’s view, and the recommendation of Pearl Meyer, with respect to typical annual salary increases for employees in our industry. In addition, theamended and restated employment agreements effective upon the closing of our IPO in February 2012 provided for further increases in the base salaries for ourcurrent executive officers to recognize their increased responsibilities with respect to serving as executives of a publicly-traded company. Mr. Forrester’s annualbase salary is $370,000. 95Table of Contents Dr. Pachter’s annual base salary is $300,000. Mr. Brannelly’s base salary is $258,000. We believe that these base salaries established for our named executiveofficers are aligned with our executive compensation objectives stated above and are competitive with those of similarly-situated companies. Annual performance-based cash bonus Because we only commenced operations in November 2010, none of our named executive offices received an annual cash bonus for 2010. Our board ofdirectors subjectively determined the amount of annual cash bonuses for our current executive officers for 2011 in December 2011. We did not establishspecific corporate or individual performance goals for our executive officers for 2011. Dr. Westphal did not receive an annual cash bonus for 2011. In accordance with the terms of their employment agreements with us, Mr. Forrester andDr. Pachter were eligible to receive an annual bonus for 2011 based on a percentage of their base salary. Mr. Forrester has an annual bonus target of 35% of hisbase salary, and Dr. Pachter has an annual bonus target of 30% of his base salary. Our board of directors awarded Mr. Forrester a 2011 bonus of $130,000and Dr. Pachter a 2011 bonus of $38,500. Our board of directors also awarded Mr. Brannelly a 2011 discretionary cash bonus of $55,000. Our board’sdetermination of these bonus awards was based primarily on its consideration of key company achievements during 2011, including the following: · operational achievements related to hiring our team of employees, consultants and contract research organizations and our scientific advisoryboard, establishing a facility consisting of office and laboratory space, raising capital through preferred stock financings and filing aregistration statement for our IPO; · product discovery achievements related to screening compounds, selecting early development candidates, establishing the putative mechanismof action of VS-507, progressing our understanding of CSC biology and focusing on key CSC-related pathways; · product development achievements related to preclinical development of our lead product candidates; · biomarker and diagnostic achievements related to selecting potential genetic and protein biomarkers for validation studies; and · business development achievements related to transactions with the Whitehead Institute for Biomedical Research, the Broad Institute, theMassachusetts Institute of Technology, the President and Fellows of Harvard College and Poniard Pharmaceuticals, Inc. Neither Dr. Jindal nor Dr. Elliott received an annual bonus for 2011. We are in the process of designing an annual cash bonus program to reward our named executive officers in the future. We expect that our annual cash bonusprogram will be based upon the achievement of specified annual corporate and individual goals that will be established in advance by our compensationcommittee. We expect that our annual cash bonus program will emphasize pay-for-performance and will be intended to closely align executive compensationwith achievement of specified operating results as the amount will be calculated on the basis of percentage of corporate goals achieved. The performance goalsestablished by our compensation committee beginning with the 2012 fiscal year will be based on the business strategy of the company and the objective ofbuilding stockholder value. We expect that there will be three steps to determine if and the extent to 96Table of Contents which an annual cash bonus is payable to a named executive officer. First, at the beginning of the year, our compensation committee will determine the targetannual cash incentive award for the named executive officer based on a percentage of the officer’s annual base salary for that year. Second, the compensationcommittee will establish the specific performance goals, including both corporate and individual objectives, that must be met for the officer to receive theaward. Third, shortly after the end of the year, the compensation committee will determine the extent to which these performance goals were met and theamount of the award. Our compensation committee is currently working with our chief executive officer to develop corporate and individual goals that theybelieve can be reasonably achieved with hard work over the course of the year and will target total cash compensation, consisting of base salaries and targetannual cash bonuses, generally between the 50th and 75th percentile of companies in our peer group. The amended and restated employment agreementseffective upon our IPO in February 2012 provide for increases in the target bonus percentage for our current executive officers to recognize their increasedresponsibilities with respect to serving as executives of a publicly-traded company. Mr. Forrester’s agreement provides for an annual bonus target of 40% of hisbase salary and Dr. Pachter’s agreement provides for an annual bonus target of 35% of his base salary. The employment agreement with Mr. Brannellyeffective in March 2012 established a target bonus percentage to recognize Mr. Brannelly’s increased responsibilities with respect to serving as a Vice Presidentof Finance of a publicly-traded company. Mr. Brannelly’s agreement provides for an annual bonus target of 30% of his base salary. Stock-based awards Our equity award program is the primary vehicle for offering long-term incentives to our executives. While we do not have any equity ownership guidelines forour executives, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help toalign the interests of our executives and our stockholders. In addition, the vesting feature of our equity awards contributes to executive retention by providingan incentive for our executives to remain in our employ during the vesting period. Prior to our IPO, our executives were eligible to participate in our 2010 equityincentive plan, and all equity awards granted in 2011 were pursuant to the 2010 equity incentive plan. Following the closing of our IPO in February 2012, ouremployees and executives became eligible to receive stock-based awards pursuant to our 2012 incentive plan. Under our 2012 incentive plan, executives areeligible to receive grants of stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and other stock-based equity awardsat the discretion of our board of directors. Our equity awards have typically been in the form of stock options. Because our executives profit from stock options only if our stock price increases relativeto the stock option’s exercise price, we believe stock options provide meaningful incentives for our executives to achieve increases in the value of our stock overtime. While we currently expect to continue to use stock options as the primary form of equity awards that we grant, we have used and may in the futurecontinue to use alternative forms of equity awards, such as restricted stock and restricted stock units. To date, we have generally used equity awards to compensate our executive officers in the form of initial grants in connection with the commencement ofemployment. However, we have also approved restricted stock units, granted effective upon the closing of our IPO, to our executive officers other thanDr. Westphal as further described under the heading “—Grants of plan-based awards in 2011.” In the future, we also generally plan to grant equity awards onan annual basis to our executive officers. We expect that, beginning in 2012, our compensation committee generally will target the equity awards of ourexecutive officers at the 75th percentile of companies in our peer group. We may also make additional discretionary grants, typically in connection with 97Table of Contents the promotion of an employee, to reward an employee, for retention purposes or in other circumstances recommended by management. In general, the equity awards that we have granted to our executives vest with respect to 25% of the shares on the first anniversary of the grant date and withrespect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of the grant date. Vesting ceases upon terminationof employment and exercise rights cease shortly after termination of employment. Prior to the exercise of a stock option, the holder has no rights as astockholder with respect to the shares subject to such option, including voting rights or the right to receive dividends or dividend equivalents. We have granted stock options with exercise prices that are set at no less than the fair value of shares of our common stock on the date of grant as determinedby our board of directors. The exercise price of all stock options granted after the closing of our IPO will be equal to the fair value of shares of our commonstock on the date of grant, which generally will be determined by reference to the closing market price of our common stock on the date of grant. We have not granted any equity awards to Dr. Westphal in connection with his service as our President and Chief Executive Officer. As one of our co-founders,we issued and sold to Dr. Westphal 628,571 shares of our common stock at a price per share of $0.00035 in August 2010 in connection with our formation.These shares are subject to repurchase by us pursuant to a restricted stock agreement with Dr. Westphal. These shares vest with respect to 25% of the shareson the grant date and with respect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of the grant date. Inaddition Dr. Westphal has received an annual stock option awards in connection with his service on our board of directors, as further described under theheading “—Director compensation.” In April 2011, in recognition of the commencement of Mr. Forrester’s employment with us, we issued and sold to Mr. Forrester 128,000 shares of our commonstock pursuant to his employment agreement. These shares are subject to repurchase by us pursuant to the terms of a restricted stock agreement. These sharesvest with respect to 25% of the shares on the first anniversary of his date of hire and with respect to the remaining shares in approximately equal monthlyinstallments through the fourth anniversary of his date of hire. The purchase price of the restricted stock was $0.28 per share, the fair value of our commonstock on the date of grant as determined by our board of directors. We also granted restricted stock units to Mr. Forrester, effective upon the closing of our IPO,as described under the heading “—Grants of plan-based awards in 2011.” In September 2011, in recognition of the commencement of Dr. Pachter’s employment with us, we granted Dr. Pachter an option to purchase 68,571 shares ofour common stock pursuant to his employment agreement. This option vests with respect to 25% of the shares on the first anniversary of his date of hire andwith respect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of his date of hire. The exercise price of thisoption is $1.93 per share, the fair value of our common stock on the date of grant as determined by our board of directors. We also granted restricted stockunits to Dr. Pachter, effective upon the closing of our IPO, as described under the heading “—Grants of plan-based awards in 2011.” We did not grant any equity awards to Mr. Brannelly in 2011. In December 2010, in recognition of the commencement of Mr. Brannelly’s employment withus, we granted Mr. Brannelly an option to purchase 60,000 shares of our common stock. This option vests with respect to 25% of the shares on the firstanniversary of his date of hire and with respect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of hisdate of hire. The exercise price of this option is $0.28 per share, the fair value of our common stock on the date of grant as determined by our board ofdirectors. We also granted 98Table of Contents restricted stock units to Mr. Brannelly, effective upon the closing of our IPO, as described under the heading “—Grants of plan-based awards in 2011.” We did not grant any equity awards to Dr. Jindal in 2011. As one of our co-founders, we issued and sold to Dr. Jindal 357,142 shares of our common stock inAugust 2010 in connection with our formation. Pursuant to a restricted stock agreement with Dr. Jindal, as amended, we repurchased 166,480 shares fromhim. In April 2011, in recognition of the commencement of Dr. Elliott’s employment with us, we issued and sold to Dr. Elliott 128,000 shares of our common stockpursuant to his employment agreement at a price of $0.28 per share, the fair value of our common stock on the date of grant as determined by our board ofdirectors. Pursuant to a restricted stock agreement with Dr. Elliott, we repurchased 120,000 shares in connection with Dr. Elliott’s transition from our employeeto a member of our scientific advisory board. Benefits and other compensation We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. Wemaintain broad-based benefits that are provided to all employees, including health and dental insurance, life and disability insurance and a 401(k) plan. All ofour executives are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees. Under our 401(k) plan, wematch 100% of employee contributions up to an amount equal to 3% of the employee’s salary and then match 50% of employee contributions up to an amountequal to an additional 2% of the employee’s salary. The match vests immediately. Consistent with our compensation philosophy, we intend to continue tomaintain our current benefits for our named executive officers. In certain circumstances, we may award cash signing bonuses or may reimburse relocation expenses when executives first join us. Whether a signing bonus ispaid or relocation expenses are reimbursed, and the amount of either such benefit, is determined by our board of directors on a case-by-case basis based on thespecific hiring circumstances and the recommendation of our chief executive officer. Dr. Pachter, who joined us in June 2011, received a signing bonus of $50,000 payable upon commencement of employment. We also reimbursed Dr. Pachterfor $12,926 of relocation expenses in connection with his move to our area to commence employment with us. Severance and change in control benefits Pursuant to employment agreements we have entered into with certain of our executives, these executives are entitled to specified benefits in the event of thetermination of their employment under specified circumstances, including termination following a change in control of our company. Please refer to “—Employment agreements” for a more detailed discussion of these benefits. We have provided estimates of the value of the severance payments made andother benefits provided to executives under various termination circumstances, under the heading “—Potential payments upon termination or change incontrol” below. We believe providing these benefits helps us compete for executive talent. After reviewing the practices of companies represented in the compensation peergroup, we believe that our severance and change in control benefits are generally in line with severance packages offered to executives of the companies in ourpeer group. Based on the substantial business experience of the members of our board of directors and consultation with Pearl Meyer, we believe that ourseverance and change in control benefits are generally in line with severance 99Table of Contents packages offered to executives by companies at comparable stages of development in our industry and related industries. We have structured our change in control benefits as “double trigger” benefits. In other words, the change in control does not itself trigger benefits. Rather,benefits are paid only if the employment of the executive is terminated during a specified period in connection with the change in control. We believe a “doubletrigger” benefit maximizes stockholder value because it prevents an unintended windfall to executives in the event of a friendly change in control, while stillproviding them appropriate incentives to cooperate in negotiating any change in control in which they believe they may lose their jobs. Risk considerations in our compensation program Our compensation committee is evaluating the philosophy and standards on which our compensation plans will be implemented across our company. It is ourbelief that our compensation programs do not, and in the future will not, encourage inappropriate actions or risk taking by our executive officers. We do notbelieve that any risks arising from our employee compensation policies and practices are reasonably likely to have a material adverse effect on our company. Inaddition, we do not believe that the mix and design of the components of our executive compensation program will encourage management to assume excessiverisks. We believe that our current business process and planning cycle fosters the behaviors and controls that would mitigate the potential for adverse riskcaused by the action of our executives. We believe that the following aspects of our executive compensation program that we plan to implement will mitigate thepotential for adverse risk caused by the action of our executives: · annual establishment of corporate and individual objectives for our performance-based cash bonus programs for our executive officers, which we expectto be consistent with our annual operating and strategic plans, designed to achieve the proper risk/reward balance and not require excessive risk taking toachieve; · the mix between fixed and variable, annual and long-term and cash and equity compensation, which we expect to be designed to encourage strategies andactions that balance the company’s short-term and long-term best interests; and · equity incentive awards that vest over a period of time, which we believe will encourage executives to take a long-term view of our business. Tax and accounting considerations Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to ourchief executive officer and our three other most highly paid officers (other than the chief executive officer and the chief financial officer). Qualifyingperformance-based compensation is not subject to the deduction limitation if specified requirements are met. We will periodically review the potentialconsequences of Section 162(m) and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to complywith exemptions in Section 162(m) so that the compensation will remain tax deductible to us. However, the board of directors or compensation committee may,in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments areappropriate to attract and retain executive talent and are in the best interests of our stockholders. 100Table of Contents We account for equity compensation paid to our employees in accordance with Financial Accounting Standards Board, or FASB, Accounting StandardCodification Topic 718, Compensation-Stock Compensation, or ASC 718, which requires us to measure and recognize compensation expense in ourfinancial statements for all share-based payments based on an estimate of their fair value over the service period of the award. We record cash compensation asan expense at the time the obligation is accrued. SUMMARY COMPENSATION TABLE The following table sets forth the total compensation awarded to, earned by or paid to our named executive officers during 2011. Name and principal positionYearSalary($)Bonus($)Stockawards($)(1)Optionawards($)(2)All othercompensation($)(3)Total($)Christoph Westphal, M.D., Ph.D.(4)2011——————President and Chief Executive Officer Robert Forrester2011252,775130,00035,840—7,052425,667Chief Operating Officer Jonathan Pachter, Ph.D.2011129,23688,500(5)—81,33620,440319,512Vice President, Head of Research Paul Brannelly2011164,42755,000——4,539223,966Vice President of Finance, Formerprincipal financial officer Satish Jindal, Ph.D.(6)2011300,019———4,521304,540Former President and Chief OperatingOfficer Peter Elliott, Ph.D.(7)2011108,505—35,840—1,728146,073Former Head of Research andDevelopment (1) The amounts in the “Stock awards” column reflect the aggregate grant date fair value of restricted stock granted during the year computed inaccordance with the provisions of ASC 718, excluding the impact of estimated repurchases by us related to service-based vesting conditions. Theassumptions that we used to calculate these amounts are discussed in Note 6 to our financial statements appearing elsewhere in this Annual Reporton Form 10-K. (2) The amounts in the “Option awards” column reflect the aggregate grant date fair value of stock options granted during the year computed inaccordance with the provisions of ASC 718, excluding the impact of estimated forfeitures related to service-based vesting conditions (which in ourcase were none). The assumptions that we used to calculate these amounts are discussed in Note 6 to our financial statements appearing elsewhere inthis Annual Report on Form 10-K. (3) The amounts in the “All other compensation” column reflect the value of perquisites and other personal benefits, which are further detailed below. 101Table of Contents Name401(k) match($)Group lifeinsurancepremium($)Relocationexpensereimbursement($)Total($)Christoph Westphal, M.D., Ph.D.————Robert Forrester6,677375—7,052Jonathan Pachter, Ph.D.7,16934512,92620,440Paul Brannelly4,269270—4,539Satish Jindal, Ph.D.3,2311,290—4,521Peter Elliott, Ph.D.1,383345—1,728 (4) Dr. Westphal did not receive any compensation from us for his service as our President and Chief Executive Officer in 2011. (5) The bonus amount for Dr. Pachter includes a signing bonus of $50,000 paid upon the commencement of his employment with us. (6) In February 2011, Dr. Jindal transitioned from his former role as our President and Chief Operating Officer to his current capacity as our non-executive employee pursuant to the terms of a transition services agreement. (7) Dr. Elliott’s employment with us ended in August 2011. GRANTS OF PLAN-BASED AWARDS IN 2011 The following table sets forth information regarding grants of plan-based awards to our named executive officers during 2011. NameGrantdateAll other stockawards: numberof shares ofstock(#)All other optionawards:number of securitiesunderlying options(#)Exercisepriceof optionawards($/share)(1)Grant datefairvalue of stockand optionawards($)(2)Christoph Westphal, M.D., Ph.D.—————Robert Forrester3/3/2011128,000(3)——35,840Jonathan Pachter, Ph.D.9/6/2011—68,571(4)1.9381,336Paul Brannelly—————Satish Jindal, Ph.D.—————Peter Elliott, Ph.D.3/3/2011128,000(5)——35,840 (1) Option awards have been granted with exercise prices equal to the fair value of our common stock on the date of grant. For a discussion of ourmethodology for determining the fair value of our common stock, see “Management’s discussion and analysis of financial condition and results ofoperations—Critical accounting policies and significant judgments and estimates.” (2) The amounts in the “Grant date fair value of stock and option awards” column reflect the grant date fair value of stock and option awards grantedin 2011 calculated in accordance with ASC 718. 102Table of Contents (3) Mr. Forrester paid $0.28 per share for the stock award. Stock award vests with respect to 25% of the shares on the first anniversary ofMr. Forrester’s date of hire, which was in March 2011, and with respect to the remaining shares in approximately equal monthly installmentsthrough the fourth anniversary of his date of hire. (4) Option award vests with respect to 25% of the shares on the first anniversary of Dr. Pachter’s date of hire, which was in July 2011, and withrespect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of his date of hire. (5) Dr. Elliott paid $0.28 per share for the stock award. Pursuant to a restricted stock agreement with Dr. Elliott, we repurchased 120,000 shares inconnection with Dr. Elliott’s transition from our employee to a member of our scientific advisory board. The remaining shares of stock are fullyvested. In December 2011 we approved awards of restricted stock units, which were granted effective upon the closing of our IPO in February 2012, to variousemployees, including our executive officers, as part of our effort to bring our equity compensation more into line with that of companies in our peer group. Therestricted stock units approved in 2011 for our named executive officers other than Dr. Westphal are as follows: NameNumber of restrictedstock unitsRobert Forrester142,857Jonathan Pachter, Ph.D.85,714Paul Brannelly28,571 Each restricted stock unit represents the right to receive one share of our common stock if the vesting conditions are satisfied. The restricted stock units vestwith respect to 25% of the shares on the first anniversary of the closing of our IPO and with respect to the remaining shares in approximately equal semi-annual installments through the fourth anniversary of the closing of our IPO. OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2011 The following table sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2011. Option awardsStock awardsNameNumber ofsecuritiesunderlyingunexercisedoptions(#)exercisableNumber ofsecuritiesunderlyingunexercisedoptions(#)unexercisableOptionexerciseprice($)OptionexpirationdateNumber ofshares thathave notvested(#)Market valueof shares thathave notvested($)Christoph Westphal, M.D., Ph.D.————324,107(1)3,241,070(2)Robert Forrester————128,000(3)1,280,000(2)Jonathan Pachter, Ph.D.—68,571(4)1.939/6/2021——Paul Brannelly15,00045,000(5)0.2812/3/2020——Satish Jindal, Ph.D.————17,671(6)176,710(2)Peter Elliott, Ph.D.—————— 103Table of Contents (1) Stock award vested with respect to 25% of the shares on the grant date, which was in August 2010, and vests with respect to the remaining sharesin approximately equal quarterly installments through the fourth anniversary of the grant date. (2) The market value of the stock award is based on our IPO price of $10.00 per share. (3) Stock award vests with respect to 25% of the shares on the first anniversary of Mr. Forrester’s date of hire, which was in March 2011, and withrespect to the remaining shares in approximately equal monthly installments through the fourth anniversary of his date of hire. (4) Option award vests with respect to 25% of the shares on the first anniversary of Dr. Pachter’s date of hire, which was in July 2011, and withrespect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of his date of hire. (5) Option award vests with respect to 25% of the shares on the first anniversary of Mr. Brannelly’s date of hire, which was in November 2010, andwith respect to the remaining shares in approximately equal quarterly installments through the fourth anniversary of his date of hire. (6) Stock award vests in installments specified in a restricted stock agreement with Dr. Jindal, as amended, and became fully vested in February 2012. OPTIONS EXERCISED AND STOCK VESTED None of our named executive officers exercised any options during 2011. The following table sets forth information regarding the vesting of stock during 2011for each of our named executive officers. Stock awardsNameNumber ofshares acquiredon vesting(#)Value realized onvesting($)(1)Christoph Westphal, M.D., Ph.D.117,857(2)229,969Robert Forrester——Jonathan Pachter, Ph.D.——Paul Brannelly——Satish Jindal, Ph.D.66,964(3)130,663Peter Elliott, Ph.D.8,000(4)15,400 (1) The value realized upon vesting is equal to the fair value of our common stock on the vesting date multiplied by number of shares acquired onvesting. 104Table of Contents (2) Stock award vested with respect to 25% of the shares on the grant date, which was in August 2010, and vests with respect to the remaining sharesin approximately equal quarterly installments through the fourth anniversary of the grant date. (3) Stock award vests in installments specified in a restricted stock agreement with Dr. Jindal, as amended, and will be fully vested in February 2012. (4) Pursuant to a restricted stock agreement with Dr. Elliott, we repurchased 120,000 shares in connection with Dr. Elliott’s transition from our employeeto a member of our scientific advisory board. The remaining shares of stock are fully vested. EMPLOYMENT AGREEMENTS In connection with the commencement of their employment with us, we entered into employment agreements with each of Mr. Forrester and Dr. Pachter. Weamended and restated these agreements effective upon the closing of our IPO in February 2012. We also entered into an employment agreement withMr. Brannelly, a former executive officer and our current Vice President of Finance, in March 2012. Each of these employment agreements provides thatemployment will continue for an indefinite period until either we or the employee provides written notice of termination in accordance with the terms of theagreement. In addition, each of these executive officers is bound by the terms of an employee non-solicitation, non-competition, confidential information andinventions assignment agreement that, among other things, prevents the executive from competing with us during the term of his employment and for aspecified time thereafter. Pursuant to the terms of the amended and restated employment agreements, Mr. Forrester, Dr. Pachter and Mr. Brannelly will receive the following base salariesand will be eligible for the following bonus percentages. NameAnnual Base Salary$Bonus Percentage(%)Robert Forrester370,00040Jonathan Pachter, Ph.D.300,00035Paul Brannelly258,00030 Upon execution and effectiveness of a release of claims, each of Mr. Forrester, Dr. Pachter and Mr. Brannelly will be entitled to severance payments if weterminate his employment without cause, as defined in the employment agreement, or Mr. Forrester, Dr. Pachter or Mr. Brannelly terminates employment withus for good reason, as defined in the employment agreement. If Mr. Forrester’s, Dr. Pachter’s or Mr. Brannelly’s employment terminates under these circumstances, in each case absent a change in control, as defined inthe employment agreement, we will be obligated for a period of 12 months, in the case of Mr. Forrester, 9 months, in the case of Dr. Pachter, and six monthsin the case of Mr. Brannelly, (1) to pay such employee his base salary, (2) to provide that any equity awards granted prior to or in connection with the closingof this offering will continue vesting and (3) to the extent allowed by applicable law and the applicable plan documents, continue to provide to such employeeall company employee benefit plans and arrangements that he was receiving at the time of termination. If Mr. Forrester’s, Dr. Pachter’s or Mr. Brannelly’s employment terminates under these circumstances, in each case within 90 days prior to, or 18 monthsfollowing, a change in control, we will be obligated (1) to pay such employee a lump sum amount equal to 12 months of his base salary, in the case ofMr. Forrester and Dr. 105Table of Contents Pachter, and six months of his base salary, in the case of Mr. Brannelly, (2) accelerate in full the vesting of all outstanding equity awards and (3) to the extentallowed by applicable law and the applicable plan documents, continue to provide to such employee, for a period of 12 months, in the case of Mr. Forresterand Dr. Pachter, and six months, in the case of Mr. Brannelly, all company employee benefit plans and arrangements that he was receiving at the time oftermination. To the extent that any severance or compensation payment to Mr. Forrester pursuant to his employment agreement constitutes an “excess parachute payment”within the meaning of Sections 280G and 4999 of the Internal Revenue Code, then Mr. Forrester will be entitled to an additional gross-up payment equal to thesum of the amount of tax owed by him in connection with such “excess parachute payment” and any interest or penalties thereon. POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL The following tables set forth information regarding potential payments that each named executive officer who was serving as an executive officer as ofDecember 31, 2011 would have received if the executive officer’s employment had terminated as of December 31, 2011 under the circumstances set forthbelow, assuming that the amended and restated employment agreements described above for each of the named executive officers were in effect as ofDecember 31, 2011. Termination without cause or for goodreason absent a change in controlNameCashpayment$Value of stock-basedawards withacceleratedvesting (1)$Value of benefits$Robert Forrester370,000544,3492,163,127(2)Jonathan Pachter, Ph.D.225,000138,42215,210Paul Brannelly129,000146,64210,140 (1) The value of stock options with accelerated vesting represents the value of unvested stock options as of December 31, 2011 based on the differencebetween the exercise price of the options and the IPO price of $10.00 per share. (2) Under the terms of the conditional 280G gross-up provisions in Mr. Forrester’s amended and restated employment agreement described above,Mr. Forrester would receive an additional severance payment in the amount of $2,163,127 to ensure appropriate treatment of any “excess parachutepayments” to Mr. Forrester within the meaning of Sections 280G and 4999 of the Internal Revenue Code. 106Table of Contents Termination without cause or for good reason within90 days prior to,or 18 months following, a change in controlNameCash payment$Value ofstock-basedawardswithacceleratedvesting(1)$Value ofbenefits$Robert Forrester370,0002,672,7302,163,127(2)Jonathan Pachter, Ph.D.300,0001,410,85120,280Paul Brannelly129,000585,71010,140 (1) The value of stock options with accelerated vesting represents the value of unvested stock options as of December 31, 2011 based on the differencebetween the exercise price of the options and our IPO price of $10.00 per share. (2) Under the terms of the conditional 280G gross-up provisions in Mr. Forrester’s amended and restated employment agreement described above,Mr. Forrester would receive an additional severance payment in the amount of $2,163,127 to ensure appropriate treatment of any “excess parachutepayments” to Mr. Forrester within the meaning of Sections 280G and 4999 of the Internal Revenue Code. PENSION BENEFITS We do not maintain any defined benefit pension plans. NONQUALIFIED DEFERRED COMPENSATION We do not maintain any nonqualified deferred compensation plans. 401(K) RETIREMENT PLAN We maintain a defined contribution employee retirement plan for our employees. Our 401(k) plan is intended to qualify as a tax-qualified plan underSection 401 of the Internal Revenue Code so that contributions to our 401(k) plan, and income earned on such contributions, are not taxable to participantsuntil withdrawn or distributed from the 401(k) plan. Our 401(k) plan provides that each participant may contribute up to 100% of his or her pre-taxcompensation, up to a statutory limit, which is $17,000 for 2012. Participants who are at least 50 years old can also make “catch-up” contributions, which in2012 may be up to an additional $5,500 above the statutory limit. Under our 401(k) plan, each employee is fully vested in his or her deferred salarycontributions. Employee contributions are held and invested by the plan’s trustee. Our 401(k) plan also permits us to make discretionary contributions andmatching contributions, subject to established limits and a vesting schedule. Beginning in July 2011, we made an employer matching contribution equal to(1) 100% of employee deferral contributions up to a deferral rate of 3% of compensation plus (2) 50% of employee deferral contributions up to a deferral rate ofan additional 2% of compensation. DIRECTOR COMPENSATION During 2011, we did not pay cash compensation to any director for his service as a director, except Henri Termeer. Mr. Termeer received an annual retainer feeof $25,000 for his service on our board of directors in 2011. We have historically reimbursed our non-employee directors for reasonable travel and otherexpenses incurred in connection with attending board of director and committee meetings. As discussed in the “Executive compensation” section of this Annual Report on Form 10-K, our President and Chief Executive Officer, Christoph Westphal,M.D., Ph.D., who is also chairman of our board of directors, has 107Table of Contents not historically received any compensation in connection with his service as our President and Chief Executive Officer. Following the closing of our IPO inFebruary 2012, Dr. Westphal has been compensated for his service on our board of directors as described below. During 2011, we did not grant equity awards as compensation to any of our directors, except Henri Termeer. In June 2011, in recognition of thecommencement of his service on our board of directors, we granted Mr. Termeer an option to purchase 35,714 shares of our common stock. This option vestswith respect to 25% of the shares on the first anniversary of the grant date and with respect to the remaining shares in approximately equal quarterlyinstallments through the fourth anniversary of the grant date. The exercise price of this option is $0.28 per share, the fair value of our common stock on thedate of grant as determined by our board of directors. Following the closing of our IPO in February 2012, our directors were compensated, and will be compensated in the future, for service on our board ofdirectors as follows: · an annual retainer for our non-employee directors for service on our board of directors of $30,000; · for members of the audit committee, an annual fee of $7,500 ($15,000 for the chair); · for non-employee members of the nominating and corporate governance committee, an annual fee of $3,750 ($7,500 for the chair); · for members of the compensation committee, an annual fee of $5,000 ($10,000 for the chair); · for any non-employee chairman of our board of directors, an additional annual fee of $40,000; · for any lead director of our board of directors, an additional annual fee of $20,000; · for any newly elected director, an initial stock option grant of 25,000 shares of our common stock; and · an annual stock option grant for continuing service on our board of directors of 12,500 shares of our common stock. Subject to the director’s continued service as a director, the initial and annual stock option grants will vest in approximately equal monthly installmentsthrough the first anniversary of the grant date. In addition, we will continue to reimburse our non-employee directors for reasonable travel and other expenses incurred in connection with attending board ofdirector and committee meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, ofany other entity that has one or more of its executive officers serving as a member of our board of directors or our compensation committee. FromDecember 2010 until December 2011, the members of our compensation committee were John K. Clarke, Stephen Kraus and Christoph Westphal, M.D.,Ph.D. Neither Mr. Clarke nor Mr. Kraus is or has been an officer or employee of our company. Dr. Westphal has served as our President and Chief ExecutiveOfficer since September 2011. For a description of transactions between us and members of our compensation committee and affiliates of such members,please see “Transactions with related persons.” 108Table of Contents COMPENSATION COMMITTEE REPORT The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K withour management. Based on this review and discussion, the Compensation Committee recommended to our board of directors that the CompensationDiscussion and Analysis be included in this Annual Report on Form 10-K. By the Compensation Committee of the Board of Directors,Henri Termeer (chair)Richard AldrichStephen Kraus 109Table of Contents Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Securities Authorized for Issuance Under Equity Compensation Plans See “Securities Authorized for Issuance Under Equity Compensation Plans” in Item 5 of this Annual Report on Form 10-K. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information with respect to the beneficial ownership of our common stock as of March 15, 2012 by: · each of our directors; · each of our named executive officers; · all of our directors and executive officers as a group; and · each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock. The column entitled “Percentage of shares beneficially owned” is based on a total of 21,059,116 shares of our common stock outstanding as of March 15,2012. Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to ourcommon stock. Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of March 15, 2012 are consideredoutstanding and beneficially owned by the person holding the options for the purpose of calculating the percentage ownership of that person but not for thepurpose of calculating the percentage ownership of any other person. Except as otherwise noted, we believe the persons and entities in this table have sole votingand investing power with respect to all of the shares of our common stock beneficially owned by them, subject to community property laws, where applicable.Except as otherwise set forth below, the address of the beneficial owner is c/o Verastem, Inc., 215 First Street, Suite 440, Cambridge, Massachusetts 02142. 110Table of Contents Name and address of beneficial ownerNumber of sharesbeneficially ownedPercentage ofsharesbeneficiallyowned5% stockholders:Entities affiliated with Bessemer Venture Partners(1)1,995,2379.5%196 Broadway, 2nd FloorCambridge, MA 02139CHP III, L.P.(2)2,234,12610.6%230 Nassau StreetPrinceton, NJ 08542Eastern Capital Limited(3)1,142,8575.4%c/o Foreshore Corporate Services Ltd.4th Floor, Queensgate House113 South Church StreetGeorge Town, Grand Cayman KY1-1104Cayman IslandsLongwood Fund, LP(4)2,869,84113.6%800 Boylston Street, Suite 1555Boston, MA 02199MPM Bioventures V, LP(5)2,029,5939.6%c/o MPM Asset Management200 Clarendon Street, 54th FloorBoston, MA 02116Directors and Executive OfficersChristoph Westphal, M.D., Ph.D.(6)3,500,49516.6%Robert Forrester128,000*Jonathan Pachter, Ph.D.——Satish Jindal, Ph.D.190,662*Paul Brannelly(7)22,500*Peter Elliott, Ph.D.8,000*Richard Aldrich(8)3,414,78016.2%John K. Clarke(9)2,236,20910.6%Ansbert Gadicke, M.D.(10)2,031,6769.6%Stephen Kraus(11)2,083*Henri Termeer(12)2,083*All executive officers and directors as a group (8 persons)11,804,74156.0% * Represents beneficial ownership of less than one percent of our outstanding common stock. (1) Consists of (a) 279,333 shares of common stock held by Bessemer Venture Partners VII Institutional L.P. (“BVP Institutional”), (b) 638,476shares of common stock held by Bessemer Venture Partners VII L.P. (“BVP VII”), and (c) 1,077,428 shares of common stock held by BVP VIISpecial Opportunity Fund L.P. (“BVP Special Opportunity” and together with BVP Institutional and BVP VII, “Bessemer Venture Partner Entities”).Deer VII & Co. L.P. (“Deer L.P.”) is the general partner of the Bessemer Venture Partner Entities. Deer VII & Co. Ltd. is the general partner of DeerL.P. J. Edmund Colloton, Robin S. Chandra, David J. Cowan, Robert P. Goodman, Jeremy S. Levine and Robert M. Stavis are the directors of DeerVII & Co. Ltd. and share voting and dispositive power over the shares of stock held by the Bessemer Venture Partner Entities. Each of Mr. Colloton,Mr. Chandra, Mr. Cowan, Mr. Goodman, Mr. Levine and Mr. Stavis disclaims beneficial ownership of the shares identified in this footnote exceptas to his or her respective proportionate pecuniary interest in such shares. (2) Consists of 2,234,126 shares of common stock. John K. Clarke, Brandon H. Hull, Charles G. Hadley and John J. Park are the managingmembers of CHP III Management, LLC, the General Partner of CHP III, L.P., and exercise shared voting, investment, and dispositive rights withrespect to the shares of stock held by CHP III, L.P. Each of Messrs. Clarke, Hull, Hadley and Park disclaims beneficial ownership of the sharesidentified in this footnote except as to his respective proportionate pecuniary interest in such shares. (3) Consists of 1,142,857 shares of common stock. Eastern Capital Limited is a direct wholly owned subsidiary of Portfolio Services Ltd., a CaymanIslands company. Kenneth Dart is the beneficial owner 111Table of Contents of all of the outstanding shares of Portfolio Services Ltd., which in turn owns all the outstanding shares of Eastern Capital Limited. Eastern CapitalLimited and Mr. Dart have shared voting and dispositive power with respect to the shares held. (4) Consists of 2,869,841 shares of common stock. Longwood Fund GP, LLC (the “General Partner”) is the general partner of Longwood Fund, LPand exercises voting and investment power with respect to securities owned directly by Longwood Fund, LP. Richard Aldrich, Michelle Dipp andChristoph Westphal are the managers of the General Partner and share voting and dispositive power with respect to the securities held by LongwoodFund, LP. The General Partner disclaims beneficial ownership of the securities owned directly by Longwood Fund, LP and this report shall not bedeemed an admission that the General Partner is the beneficial owner of such securities, except to the extent of its pecuniary interest therein. (5) Consists of 2,029,593 shares of common stock. MPM Bioventures V GP, LLC (“MPM V GP”) is the general partner of MPM Bioventures V, LPand MPM Bioventures V LLC (“MPM V LLC”) is the managing member of MPM V GP. Luke Evnin, Todd Foley, Ansbert Gadicke, VaughnKalian, James Scopa, Steven St. Peter and John Vander Vort are the members of MPM V LLC and have shared power to vote, hold and dispose ofthe shares held by MPM Bioventures V, LP. Each disclaims beneficial ownership of the securities reported herein except to the extent of his respectivepecuniary interest therein. (6) Consists of (a) 502,857 shares of common stock held by Dr. Westphal, (b) 125,714 shares of common stock held by The Fountain IrrevocableTrust of 2010, (c) 2,083 shares of common stock issuable upon exercise of stock options within 60 days of March 15, 2012 and (d) 2,869,841shares of common stock held by Longwood Fund, LP. The trustee of The Fountain Irrevocable Trust of 2010 is James Kittler and he exercises solevoting and investment power of the shares of record held by the trust. The ultimate general partner of Longwood Fund, LP is LongwoodFund GP, LLC. Voting and investment power with respect to the shares held by Longwood Fund, LP are vested in Richard Aldrich, Michelle Dippand Dr. Westphal, the managers of Longwood Fund GP, LLC. (7) Consists of shares of common stock issuable upon exercise of stock options within 60 days of March 15, 2012. (8) Consists of (a) 407,142 shares of common stock held by Mr. Aldrich, (b) 135,714 shares of common stock held by Richard H. Aldrich IrrevocableTrust of 2011, (c) 2,083 shares of common stock issuable upon exercise of stock options within 60 days of March 15, 2012 and (d) 2,869,841shares of common stock held by Longwood Fund, LP. The trustee of the Richard H. Aldrich Irrevocable Trust of 2011 is Nicole Aldrich and sheexercises sole voting and investment power over the shares of record held by the trust. The ultimate general partner of Longwood Fund, LP isLongwood Fund GP, LLC. Voting and investment power with respect to the shares held by Longwood Fund, LP. are vested in Mr. Aldrich, MichelleDipp and Christoph Westphal, the managers of Longwood Fund GP, LLC. (9) Consists of 2,234,126 shares of common stock held by CHP III, L.P. and 2,083 shares of common stock issuable upon exercise of stock optionswithin 60 days of March 15, 2012. John K. Clarke, Brandon H. Hull, Charles G. Hadley and John J. Park are the managing members of CHP IIIManagement, LLC, the General Partner of CHP III, L.P., and exercise shared voting, investment, and dispositive rights with respect to the shares ofstock held by CHP III, L.P. Each of Messrs. Clarke, Hull, Hadley and Park disclaims beneficial ownership of the shares identified in this footnoteexcept as to his respective proportionate pecuniary interest in such shares. (10) Consists of 2,029,593 shares of common stock held by MPM Bioventures V, LP and 2,083 shares of common stock issuable upon exercise ofstock options within 60 days of March 15, 2012. MPM V GP is the general partner of MPM Bioventures V, LP and MPM V LLC is the managingmember of MPM V GP. 112Table of Contents Luke Evnin, Todd Foley, Ansbert Gadicke, Vaughn Kalian, James Scopa, Steven St. Peter and John Vander Vort are the members of MPM V LLCand have shared power to vote, hold and dispose of the shares held by MPM Bioventures V, LP. Each disclaims beneficial ownership of thesecurities reported herein except to the extent of his respective pecuniary interest therein. (11) Consists of shares of common stock issuable upon exercise of stock options within 60 days of March 15, 2012. Mr. Kraus serves as an employeeof Bessemer Venture Partners, the management company affiliate of the Bessemer Venture Partner Entities that hold an aggregate of 1,995,237shares of our common stock as described above. Mr. Kraus has no voting or dispositive power with respect to the shares held by the BessemerVenture Partner Entities and disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (12) Consists of shares of common stock issuable upon exercise of stock options within 60 days of March 15, 2012. Item 13. Certain Relationships and Related Transactions, and Director Independence Transactions with related persons Since January 1, 2011, we have engaged in the following transactions with our directors, executive officers, holders of more than 5% of our voting securities,and affiliates or immediately family members of our directors, executive officers and holders of more than 5% of our voting securities, and our co-founders.We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties. PARTICIPATION IN INITIAL PUBLIC OFFERING In February 2012, we issued and sold an aggregate of 6,325,000 shares of our common stock in our initial public offering at a price per share of $10.00 for anaggregate purchase price of $63.3 million. UBS Securities and Leerink Swann LLC acted as joint book-running managers of the offering and asrepresentatives of the underwriters. The following table sets forth the number of shares of our common stock that were purchased by our 5% stockholders andtheir affiliates. Name(1)Shares of common stockBessemer Venture Partners(2)100,000(3)CHP III, L.P.(4)250,000Longwood Fund, LP(5)600,000MPM Bioventures V, LP(6)100,000 (1) See “Security Ownership of Certain Beneficial Owners and Management” in Item 12 of this Annual Report on Form 10-K for more informationabout shares held by these entities. (2) Stephen Kraus, a member of our board of directors, is a vice president of Bessemer Venture Partners. (3) Consists of (a) 14,000 shares of common stock purchased by Bessemer Venture Partners VII Institutional L.P., (b) 32,000 shares of common stockpurchased by Bessemer Venture Partners VII L.P. and (c) 54,000 shares of common stock purchased by BVP VII Special Opportunity Fund L.P. 113Table of Contents (4) John K. Clarke, a member of our board of directors, is the managing general partner of Cardinal Partners, the general partner of CHP III, L.P. (5) Christoph Westphal, M.D., Ph.D. and Richard Aldrich, members of our board of directors, are partners of Longwood Fund, LP. (6) Ansbert Gadicke, M.D., a member of our board of directors, is the managing director of MPM Capital and a member of MPM Bioventures V LLC,the general partner of MPM Bioventures V GP, LLC, which is the general partner of MPM Bioventures V, LP. SERIES C PREFERRED STOCK FINANCING In November 2011, we issued and sold an aggregate of 9,067,825 shares of our series C preferred stock at a price per share of $2.25 for an aggregatepurchase price of $20.4 million. The following table sets forth the number of shares of our series C preferred stock that we issued to our 5% stockholders andtheir affiliates. Name(1)Shares of series Cpreferred stockAdvanced Technology Ventures VIII, L.P.100,000Entities affiliated with Bessemer Venture Partners(2)133,333(3)CHP III, L.P.(4)444,444Eastern Capital Limited4,000,000Longwood Fund, LP(5)444,444MPM Bioventures V, LP(6)266,666 (1) See “Security Ownership of Certain Beneficial Owners and Management” in item 12 of this Annual Report on Form 10-K for more informationabout shares held by these entities. (2) Stephen Kraus, a member of our board of directors, is employed by Bessemer Venture Partners and has no voting or dispositive power with respectto the shares held by entities affiliated with Bessemer Venture Partners. (3) Consists of (a) 18,667 shares purchased by Bessemer Venture Partners VII Institutional L.P., (b) 42,667 shares purchased by Bessemer VenturePartners VII L.P. and (c) 71,999 shares purchased by BVP VII Special Opportunity Fund L.P. (4) John K. Clarke, a member of our board of directors, is a managing member of CHP III Management, LLC, the general partner of CHP III, L.P. (5) Christoph Westphal, M.D., Ph.D. and Richard Aldrich, members of our board of directors, are partners of Longwood Fund, LP. (6) Ansbert Gadicke, M.D., a member of our board of directors, is the managing director of MPM Capital and a member of MPM Bioventures V LLC,the general partner of MPM Bioventures V GP, LLC, which is the general partner of MPM Bioventures V, LP. 114Table of Contents SERIES B PREFERRED STOCK FINANCING In July 2011, we issued and sold an aggregate of 16,025,000 shares of our series B preferred stock at a price per share of $2.00 for an aggregate purchaseprice of $32,050,000. The following table sets forth the number of shares of our series B preferred stock that we issued to our 5% stockholders and theiraffiliates. Name(1)Shares of series Bpreferred stockAdvanced Technology Ventures VIII, L.P.2,500,000Entities affiliated with Bessemer Venture Partners(2)2,500,000(3)CHP III, L.P.(4)2,500,000Longwood Fund, LP(5)3,500,000MPM Bioventures V, LP(6)2,500,000 (1) See “Security Ownership of Certain Beneficial Owners and Management” in item 12 of this Annual Report on Form 10-K for more informationabout shares held by these entities. (2) Stephen Kraus, a member of our board of directors, is employed by Bessemer Venture Partners and has no voting or dispositive power with respectto the shares held by entities affiliated with Bessemer Venture Partners. (3) Consists of (a) 350,000 shares purchased by Bessemer Venture Partners VII Institutional L.P., (b) 800,000 shares purchased by Bessemer VenturePartners VII L.P. and (c) 1,350,000 shares purchased by BVP VII Special Opportunity Fund L.P. (4) John K. Clarke, a member of our board of directors, is a managing member of CHP III Management, LLC, the general partner of CHP III, L.P. (5) Christoph Westphal, M.D., Ph.D. and Richard Aldrich, members of our board of directors, are partners of Longwood Fund, LP. (6) Ansbert Gadicke, M.D., a member of our board of directors, is the managing director of MPM Capital and a member of MPM Bioventures V LLC,the general partner of MPM Bioventures V GP, LLC, which is the general partner of MPM Bioventures V, LP. SERIES A PREFERRED STOCK FINANCING In November 2010 and April 2011, we issued and sold an aggregate of 16,000,000 shares of our series A preferred stock at a price per share of $1.00 for anaggregate purchase price of $16,000,000. The following table sets forth the number of shares of our series A preferred stock that we issued to our 5%stockholders and their affiliates. Name(1)Shares of series Apreferred stockEntities affiliated with Bessemer Venture Partners(2)4,000,000(3)CHP III, L.P.(4)4,000,000Longwood Fund, LP(5)4,000,000MPM Bioventures V, LP(6)4,000,000 115Table of Contents (1) See “Security Ownership of Certain Beneficial Owners and Management” in item 12 of this Annual Report on Form 10-K for more informationabout shares held by these entities. (2) Stephen Kraus, a member of our board of directors, is employed by Bessemer Venture Partners and has no voting or dispositive power with respectto the shares held by entities affiliated with Bessemer Venture Partners. (3) Consists of (a) 560,000 shares purchased by Bessemer Venture Partners VII Institutional L.P., (b) 1,280,000 shares purchased by BessemerVenture Partners VII L.P. and (c) 2,160,000 shares purchased by BVP VII Special Opportunity Fund L.P. (4) John K. Clarke, a member of our board of directors, is a managing member of CHP III Management, LLC, the general partner of CHP III, L.P. (5) Christoph Westphal, M.D., Ph.D. and Richard Aldrich, members of our board of directors, are partners of Longwood Fund, LP. (6) Ansbert Gadicke, M.D., a member of our board of directors, is the managing director of MPM Capital and a member of MPM Bioventures V LLC,the general partner of MPM Bioventures V GP, LLC, which is the general partner of MPM Bioventures V, LP. REGISTRATION RIGHTS We are a party to an investor rights agreement with certain holders of our common stock, including some of our directors, executive officers and 5%stockholders and their affiliates and entities affiliated with our directors. The investor rights agreement provides these holders the right, following thecompletion of this offering, to demand that we file a registration statement or request that their shares be covered by a registration statement that we areotherwise filing. INDEMNIFICATION AGREEMENTS Our certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we haveentered into indemnification agreements with our directors. POLICIES AND PROCEDURES FOR RELATED PERSON TRANSACTIONS Our board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship in which Verastem is aparticipant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or 5% stockholders, or their immediatefamily members, each of whom we refer to as a “related person,” has a direct or indirect material interest. If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related personmust report the proposed related person transaction to our principal financial officer. The policy calls for the proposed related person transaction to be reviewedand, if deemed appropriate, approved by our audit committee. Whenever practicable, the reporting, review and approval will occur prior to entry into thetransaction. If advance review and approval is not practicable, the committee will review, and, in its discretion, may ratify the related person transaction. Thepolicy also permits the chairman of the committee to review and, if deemed appropriate, approve proposed related person 116Table of Contents transactions that arise between committee meetings, subject to ratification by the committee at its next meeting. Any related person transactions that are ongoingin nature will be reviewed annually. A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the committee after full disclosure of therelated person’s interest in the transaction. As appropriate for the circumstances, the committee will review and consider: · the related person’s interest in the related person transaction; · the approximate dollar value of the amount involved in the related person transaction; · the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss; · whether the transaction was undertaken in the ordinary course of our business; · whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party; · the purpose of, and the potential benefits to us of, the transaction; and · any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material toinvestors in light of the circumstances of the particular transaction. The committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the transaction is in our bestinterests. The committee may impose any conditions on the related person transaction that it deems appropriate. In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, our board of directors hasdetermined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related persontransactions for purposes of this policy: · interests arising solely from the related person’s position as an executive officer of another entity (whether or not the person is also a director of suchentity) that is a participant in the transaction, where (a) the related person and all other related persons own in the aggregate less than a 10% equity interestin such entity, (b) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do notreceive any special benefits as a result of the transaction and (c) the amount involved in the transaction is less than the greater of $200,000 or 5% of theannual gross revenues of the company receiving payment under the transaction; and · a transaction that is specifically contemplated by provisions of our charter or bylaws. The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in themanner specified in its charter. We did not have a written policy regarding the review and approval of related person transactions prior to this offering. Nevertheless, with respect to suchtransactions, it was our policy for our board of directors to consider 117Table of Contents the nature of and business reason for such transactions, how the terms of such transactions compared to those which might be obtained from unaffiliatedthird parties and whether such transactions were otherwise fair to and in the best interests of, or not contrary to, our best interests. In addition, all relatedperson transactions required prior approval, or later ratification, by our board of directors. Director Independence Our board of directors has determined that all of our directors, other than Dr. Westphal, are independent directors, as defined by applicable NASDAQMarketplace Rules. In making such determination, the board of directors considered the relationships that each such non-employee director has with ourcompany and all other facts and circumstances that the board of directors deemed relevant in determining their independence, including the beneficialownership of our capital stock by each non-employee director. Item 14. Principal Accountant Fees and Services Auditors’ Fees The following table summarizes the fees of Ernst & Young LLP, our registered public accounting firm, billed to us for each of the last two fiscalyears. Fee category20102011Audit Fees (1)$20,071$520,601Total Fees20,071520,601 (1) Audit fees consist of fees for the audit of our financial statements, the review of the interim financial statements and services associated with ourregistration statement on Form S-1. All such accountant services and fees were pre-approved by our audit committee in accordance with the “Pre-Approval Policies and Procedures”described below. Pre-Approval Policies and Procedures Our Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by ourregistered public accounting firm. This policy generally provides that we will not engage our registered public accounting firm to render audit or non-auditservices unless the service is specifically approved in advance by our Audit Committee or the engagement is entered into pursuant to one of the pre-approvalprocedures described below. From time to time, our Audit Committee may pre-approve specified types of services that are expected to be provided to us by our registered publicaccounting firm during the next 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is alsogenerally subject to a maximum dollar amount. 118Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules Financial Statements The following financial statements and supplementary data are filed as a part of this Annual Report on Form 10-K. Report of Independent Registered Public Accounting Firm Balance Sheets at December 31, 2011 and 2010 Statements of Operations for the year ended December 31, 2011, the period from August 4, 2010 (inception) to December 31, 2010 and the periodfrom August 4, 2010 (inception) to December 31, 2011 Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the year ended December 31, 2011, the period from August 4,2010 (inception) to December 31, 2010 and the period from August 4, 2010 (inception) to December 31, 2011 Statements of Cash Flows for the year ended December 31, 2011, the period from August 4, 2010 (inception) to December 31, 2010 and the periodfrom August 4, 2010 (inception) to December 31, 2011 Notes to Financial Statements Financial Statement Schedules All financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements ornotes thereto. Exhibits Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto and suchlisting is incorporated herein by reference. 119Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. VERASTEM, INC. By:/s/ Christoph Westphal, M.D., Ph.D. Christoph Westphal, M.D., Ph.D.President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant in thecapacities and on the dates indicated. SignatureTitleDate /s/ Christoph Westphal, M.D., Ph.DPresident, Chief Executive Officer and DirectorMarch 30, 2012Christoph Westphal, M.D., Ph.D.(Principal executive officer) /s/ Robert ForresterChief Operating OfficerMarch 30, 2012Robert Forrester(Principal financial and accounting officer) /s/ Richard AldrichRichard AldrichDirectorMarch 30, 2012 /s/ John K. ClarkeJohn K. ClarkeDirectorMarch 30, 2012 /s/ Ansbert Gadicke, M.DAnsbert Gadicke, M.DDirectorMarch 30, 2012 /s/ Stephen KrausStephen KrausDirectorMarch 30, 2012 /s/ Henri TermeerHenri TermeerDirectorMarch 30, 2012 120Table of Contents Verastem, Inc.(A development stage company)  FINANCIAL STATEMENTS Year ended December 31, 2011, the period from August 4, 2010 (inception) to December 31, 2010 and the period from August 4, 2010 (inception) toDecember 31, 2011 CONTENTS Report of Independent Registered Public Accounting FirmF-2Financial StatementsBalance SheetsF-3Statements of OperationsF-4Statements of Redeemable Convertible Preferred Stock and Stockholders’ DeficitF-5Statements of Cash FlowsF-6Notes to Financial StatementsF-7 F-1Table of Contents Verastem, Inc.(A development stage company) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders ofVerastem, Inc. We have audited the accompanying balance sheets of Verastem, Inc. (a development stage company) (the Company) as of December 31, 2011 and 2010, andthe related statements of operations, redeemable convertible preferred stock and stockholders’ deficit and cash flows for the year ended December 31, 2011, theperiod from August 4, 2010 (inception) to December 31, 2010 and for period from August 4, 2010 (inception) to December 31, 2011. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Verastem, Inc. as of December 31,2011 and 2010 and the results of its operations and its cash flows for the year ended December 31, 2011, the period from August 4, 2010 (inception) toDecember 31, 2010 and the period from August 4, 2010 (inception) to December 31, 2011, in conformity with U.S. generally accounting principles. /s/ Ernst & Young LLP Boston, MassachusettsMarch 30, 2012 F-2Table of Contents Verastem, Inc.(A development stage company) BALANCE SHEETS (in thousands, except per share amounts) December 31,20112010AssetsCurrent assets:Cash and cash equivalents$20,954$3,584Short-term investments26,857—Prepaid expenses and other current assets13012Total current assets47,9413,596Property and equipment, net7098Long-term investments8,994—Other assets1,307—Restricted cash86—Total assets$59,037$3,604Liabilities, redeemable convertible preferred stock and stockholders’ deficitCurrent liabilities:Accounts payable$2,273$279Accrued expenses87389Total current liabilities3,146368Deferred rent74—Liability for shares subject to repurchase36—Obligation to issue warrant406—Commitments and contingencies (Note 8)Series A redeemable convertible preferred stock, $0.0001 par value; 16,000 shares authorized, 16,000 and4,000 shares issued and outstanding at December 31, 2011 and 2010, respectively (Liquidation preference of$16,000 as of December 31, 2011)15,9393,923Series B redeemable convertible preferred stock, $0.0001 par value; 16,025 shares authorized, issued andoutstanding at December 31, 2011 (Liquidation preference of $32,050 as of December 31, 2011)31,948—Series C redeemable convertible preferred stock, $0.0001 par value; 9,068 shares authorized, issued andoutstanding at December 31, 2011 (Liquidation preference of $20,403 as of December 31, 2011)20,254—Common stock, $0.0001 par value; 53,093 and 30,000, shares authorized at December 31, 2011 and 2010 ,respectively, 1,559 and 1,015 shares issued and outstanding at December 31, 2011 and 2010, respectively11Additional paid-in capital1,70296Accumulated other comprehensive loss(2)—Deficit accumulated during the development stage(14,467)(784)Total stockholders’ deficit(12,766)(687)Total liabilities, redeemable convertible preferred stock and stockholders’ deficit$59,037$3,604 See accompanying notes. F-3Table of Contents Verastem, Inc.(A development stage company) STATEMENTS OF OPERATIONS (in thousands, except per share amounts) YearendedDecember 31,2011Period fromAugust 4,2010(inception) toDecember 31,2010Period fromAugust 4,2010(inception) toDecember 31,2011Operating expenses:Research and development$9,883$400$10,283General and administrative3,8153844,199Total operating expenses13,69878414,482Loss from operations(13,698)(784)(14,482)Interest income15—15Net loss(13,683)(784)(14,467)Accretion of preferred stock(32)(2)(34)Net loss applicable to common stockholders$(13,715)$(786)$(14,501)Net loss per share applicable to common stockholders—basic and diluted$(10.59)$(0.91)$(12.39)Weighted-average number of common shares used in net loss per share applicable tocommon stockholders—basic and diluted1,2958501,171 See accompanying notes. F-4 Table of Contents Verastem, Inc. (A development stage company) STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (in thousands, except share data) Series Aredeemable convertiblepreferred stockSeries Bredeemable convertiblepreferred stockSeries Credeemable convertiblepreferred stockCommon stockAdditionalpaid-inAccumulated other comprehensiveDeficitaccumulatedduring thedevelopmentTotalsstockholder’sSharesAmountSharesAmountSharesAmountSharesAmountcapitallossstagedeficitBalance at August 4,2010 (inception)—$——$——$——$—$—$—$—$—Sale of commonstock tofounders——————714,2861———1Vesting of restrictedstock——————133,926—————Issuance of commonstock inexchange forlicense——————166,664—46——46Issuance ofSeries Aredeemableconvertiblepreferred stock,net of offeringcosts of $794,000,0003,921——————————Accretion ofredeemableconvertiblepreferred stockto redemptionvalue—2——————(2)——(2)Stock-basedcompensationexpense————————52——52Net loss——————————(784)(784)Balance atDecember 31, 20104,000,0003,923————1,014,876196—(784)(687)Net loss——————————(13,683)(13,683)Unrealized loss oninvestments—————————(2)(2)Comprehensive loss$(13,685)Issuance ofSeries Aredeemableconvertiblepreferred stock12,000,00012,000——————————Issuance ofSeries Bredeemableconvertiblepreferred stock,net of offeringcosts of $113——16,025,00031,937————————Issuance ofSeries Credeemableconvertiblepreferred stock,net of offeringcosts of $153————9,067,82520,249—————— Accretion ofredeemableconvertiblepreferred stockto redemptionvalue—16—11—5——(32)——(32)Vesting of restrictedstock——————543,712—3——3Stock-basedcompensationexpense————————1,635——1,635Balance atDecember 31, 201116,000,000$15,93916,025,000$31,9489,067,825$20,2541,558,588$1$1,702$(2)$(14,467)$(12,766) See accompanying notes. F-5 Table of Contents Verastem, Inc.(A development stage company) STATEMENTS OF CASH FLOWS (in thousands) Year endedDecember 31,2011Period fromAugust 4,2010(inception) toDecember 31,2010Period fromAugust 4,2010(inception) toDecember 31,2011Operating activitiesNet loss$(13,683)$(784)$(14,467)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization83—83Stock-based compensation expense1,635521,687Common stock issued in exchange for license—4646Obligation to issue a warrant in exchange for license439—439Change in fair value of obligation to issue warrant(33)—(33)Changes in operating assets and liabilities:Prepaid expenses and other current assets(118)(12)(130)Other assets(1,307)—(1,307)Accounts payable1,9942792,273Accrued expenses and deferred rent85889947Net cash used in operating activities(10,132)(330)(10,462)Investing activitiesPurchases of property and equipment(785)(8)(793)Purchases of investments(35,851)—(35,851)Increase in restricted cash(86)—(86)Net cash used in investing activities(36,722)(8)(36,730)Financing activitiesProceeds from issuance of redeemable convertible preferred stock64,1863,92168,107Net proceeds from the issuance of common stock38139Net cash provided by financing activities64,2243,92268,146Increase in cash and cash equivalents17,3703,584$20,954Cash and cash equivalents at beginning of period3,584——Cash and cash equivalents at end of period$20,954$3,584$20,954Supplemental disclosure of non-cash financing activityAccretion of redeemable convertible preferred stock to redemption value$32$2$34 See accompanying notes. F-6 Table of Contents Verastem, Inc.(A development stage company) NOTES TO FINANCIAL STATEMENTS 1. Organization and basis of presentation Verastem, Inc. (the “Company”), incorporated on August 4, 2010 as a Delaware corporation, is a biopharmaceutical company focused on discovering anddeveloping proprietary small molecule drugs targeting cancer stem cells along with proprietary companion diagnostics. The Company’s operations to date havebeen limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology, identifying potential productcandidates and undertaking preclinical studies of its most advanced product candidates. The Company has not commenced its planned principal operations.Accordingly, the Company is considered to be in the development stage as defined in Financial Accounting Standards Board Accounting StandardsCodification Topic 915, Development Stage Entities. The Company is subject to a number of risks similar to other life science companies in the development stage, including, but not limited to, the need to obtainadequate additional funding, possible failure of preclinical testing or clinical trials, inability to obtain marketing approval of product candidates, competitorsdeveloping new technological innovations, market acceptance of the Company’s products and protection of proprietary technology. If the Company does notsuccessfully commercialize any of its product candidates, it will be unable to generate product revenue or achieve profitability. As of December 31, 2011, theCompany had a deficit accumulated during the development stage of $14.5 million. The Company expects to continue to incur operating losses in futureperiods. The Company had cash, cash equivalents and investments of $56.8 million as of December 31, 2011. The Company believes that the net proceedsfrom its initial public offering completed in February 2012, together with its existing cash, cash equivalents and investments, will be sufficient to fund itscurrent operating plan and capital expenditure requirements for the next several years. 2. Significant accounting policies Use of estimates The preparation of the Company’s financial statements in conformity with U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from suchestimates. Prior to becoming a public company in February 2012, the Company utilized significant estimates and assumptions in determining the fair value of itscommon stock. The Company granted stock options at exercise prices not less than the fair market value of its common stock as determined by the board ofdirectors, with input from management. The board of directors determined the estimated fair value of the Company’s common stock based on a number ofobjective and subjective factors, including external market conditions affecting the biotechnology industry sector and the prices at which the Company soldshares of redeemable F-7Table of Contents convertible preferred stock, the superior rights and preferences of securities senior to the Company’s common stock at the time and the likelihood of achievinga liquidity event, such as an IPO or sale of the Company. The Company utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants TechnicalPractice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock. Themethodologies included an asset-based approach and the current value method for the Company’s initial common stock valuation as of November 30, 2010,the option pricing method utilizing the reverse backsolve method to estimate the Company’s underlying equity value as of July 31, 2011 and a methodologythat determined an estimated value under an IPO scenario and a sale scenario based upon an assessment of the probability of occurrence of each scenario as ofSeptember 30, 2011, November 17, 2011, and December 31, 2011. Each valuation methodology includes estimates and assumptions that require theCompany’s judgment. These estimates include assumptions regarding future performance, including the successful completion of preclinical studies andclinical trials and the time to completing an IPO or sale. Significant changes to the key assumptions used in the valuations could result in different fair valuesof common stock at each valuation date. Segment and geographic information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operatingdecision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations andmanages its business in one operating segment, which is the business of developing drugs that target cancer stem cells, and the Company operates in only onegeographic area. Comprehensive loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances fromnon-owner sources. Comprehensive loss includes net loss and unrealized losses on investments. Cash and cash equivalents The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cashequivalents. Cash equivalents consist of money market funds, U.S. agency notes and corporate bonds. Fair value of financial instruments The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determiningthe reported fair values. The fair value hierarchy is now established that prioritizes valuation inputs based on the observable nature of those inputs. The fairvalue hierarchy applies only to the valuation inputs used in F-8Table of Contents determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuationinputs: Level 1 inputsQuoted prices in active markets for identical assets or liabilitiesLevel 2 inputsInputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectlyLevel 3 inputsUnobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing theasset or liability The following table presents information about the Company’s financial assets that have been measured at fair value at December 31, 2011 and indicates thefair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands). DescriptionTotalQuoted pricesinactivemarkets(Level 1)Significantotherobservableinputs(Level 2)Significantunobservableinputs(Level 3)Financial assetsCash equivalents$4,102$3,102$1,000$—Short-term investments26,85726,857—Long-term investments8,9948,994—Total financial assets$39,953$3,102$36,851$—Financial liabilitiesObligation to issue warrant$406$—$—$406Total financial liabilities$406$—$—$406 There were no financial instruments recorded at fair value as of December 31, 2010. The carrying amounts of accounts payable and accrued expensesapproximate their fair values due to their short-term maturities. In connection with the license with Poniard Pharmaceuticals Inc., (Poniard), as more fully described in Note 10, “License Agreements,” the Company isobligated to issue a warrant to Poniard upon the first patient dosing using a product licensed under the agreement with Poniard; such warrant will have a threeyear term from the date of issuance. Prior to an initial public offering, the exercise price of the warrant is equal to the fair value of the common stock on thedate of the most recent preferred stock financing prior to the issuance of the warrant. If the Company is publicly traded, the exercise price of the warrant isequal to the average closing price of the Company’s common stock during the five trading days preceding the issuance of the warrant. The obligation to issue the warrant is a level 3 liability because its value measurement is based, in part, on significant inputs not observed in the market andreflects the Company’s assumptions as to the expected warrant exercise price and the expected volatility of the Company’s common F-9Table of Contents stock. The obligation to issue the warrant is revalued at the end of each reporting period, with changes in the fair value reported in research and developmentexpense within the statement of operations. As of November 17, 2011, the effective date of the obligation to issue the warrant, the most recent issuance of the Company’s Preferred Stock had been theissuance of the Series C Preferred Stock in November 2011. As of December 31, 2011, there were no additional issuances of preferred stock. The Company estimated the value of the obligation to issue the warrant using a probability-weighted scenario analysis that incorporated the probability of thecompletion of an initial public offering. The analysis included estimating the stock price on each measurement date assuming that achievement of the milestonewould be 100% probable. The estimated stock price contingent upon milestone achievement was determined by analyzing the post-announcement returns forpublic companies that progressed to Phase 1 clinical trials. The following inputs were used to determine the fair value of the obligation to issue the warrant: November 17, 2011December 31, 2011Non-IPOIPONon-IPOIPOExercise price$6.86$10.00$6.86$10.00Estimated stock price contingent upon milestone achievement$3.19$8.93$3.22$8.54Expected term4.2 years4.2 years4.1 years4.1 yearsVolatility70%70%70%70%Dividend yield0.00%0.00%0.00%0.00%Risk-free rate0.64%0.64%0.60%0.60%Probability of achieving milestone80%80%80%80%Probability of scenario20%80%20%80% The fair value of the obligation to issue the warrant was recorded at $439,000. As a result of the change in inputs to the valuation model, the fair value of theobligation to issue the warrant decreased by $33,000 to $406,000 at December 31, 2011. Investments Investments and cash equivalents consist of investments in money market accounts, government-sponsored enterprise securities and commercial paper ofpublicly traded companies secured by the U.S. government that are classified as available-for-sale pursuant to Accounting Standards Codification (ASC)320, Investments — Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its balancesheets. Investments are classified as long-term assets on the balance sheets if (i) the Company has the intent and ability to hold the investments for a period ofat least one year and (ii) the contractual maturity date of the investments is greater than one year. Investments are carried at fair value with unrealized gainsand losses included as a component of accumulated other comprehensive loss, which is a separate component of stockholders’ deficit, until such gains andlosses are realized. The fair value of these securities is based on quoted prices for identical or similar assets. If a decline in the fair value is considered other-than-temporary, based on F-10Table of Contents available evidence, the unrealized loss is transferred from other comprehensive loss to the statement of operations. There were no charges taken for other-than-temporary declines in fair value of short-term or long-term investments during 2011 or 2010. Realized gains and losses are determined using the specificidentification method and are included in interest income in the statement of operations. There were no realized gains or losses recognized during 2011 or 2010. The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidenceindicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers the intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment beforerecovery of the investment’s amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with theCompany’s investment policy, the severity and the duration of the impairment and changes in value subsequent to year end. As of December 31, 2011, therewere no investments with a fair value that was significantly lower than the amortized cost basis or any investments that had been in an unrealized loss positionfor a significant period. As of December 31, 2011, cash, cash equivalents and investments included (in thousands): AmortizedCostGrossUnrealizedGainsGrossUnrealizedLossesFairValue Cash and cash equivalents:Cash and money market accounts$19,954$—$—$19,954Government-sponsored enterprise securities1,000——1,000Total cash and cash equivalents$20,954$—$—$20,954Investments:Government-sponsored enterprise securities (due within 1 year)$10,900$2$(1)$10,901Government-sponsored enterprise securities (due within 1 – 2years)8,9981(5)8,994Commercial paper secured by the U.S. government (due within1 year)15,9543(1)15,956Total investments$35,852$6$(7)$35,851Total cash, cash equivalents, and investments$56,806$6$(7)$56,805 The Company did not hold any cash equivalents or investments as of December 31, 2010. Concentrations of credit risk and off-balance sheet risk Cash and cash equivalents, short-term investments and long-term investments are financial instruments that potentially subject the Company toconcentrations of credit risk. As of December 31, 2011, the Company’s cash, cash equivalents and investments were deposited at two financial institutions.As of December 31, 2010, substantially all of the Company’s cash was deposited in accounts at a single financial F-11Table of Contents institution. The Company maintains its cash and cash equivalents and investments with high quality, accredited financial institutions and, accordingly, theCompany believes it is not exposed to any significant credit risk on these funds. The Company has no significant off-balance sheet concentrations of creditrisk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Property and equipment Property and equipment consists of laboratory equipment, office furniture, and computer equipment. Expenditures for repairs and maintenance are recorded toexpense as incurred, whereas major betterments are capitalized as additions to property and equipment. Depreciation is calculated using the straight-linemethod over the following estimated useful lives of the assets: Laboratory equipment5 yearsFurniture5 yearsComputer equipment3 years Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss isrecognized. The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of assetsmay not be fully recoverable and that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of theundiscounted cash flow to the recorded value of the asset. If impairment is indicated, the asset will be written down to its estimated fair value. To date, no suchimpairment losses have been recorded. Redeemable convertible preferred stock The carrying value of the Company’s Series A, Series B and Series C redeemable convertible preferred stock is adjusted by periodic accretions of offeringcosts such that the carrying value will equal the redemption amount at the earliest redemption date. The carrying value is also adjusted to reflect dividendswhen and if declared by the board of directors. No dividends have been declared by the board of directors since inception. Reverse stock split In January 2012, the Company’s board of directors and stockholders approved a one-for-3.5 reverse stock split of the Company’s common stock. The reversestock split became effective on January 10, 2012. All share and per share amounts in the financial statements have been retroactively adjusted for all periodspresented to give effect to the reverse stock split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. F-12Table of Contents Organizational costs All organizational costs have been expensed as incurred. Research and development costs The Company expenses research and development costs to operations as incurred. Research and development expenses consist of costs associated withresearch activities, including drug discovery efforts and the development of therapeutic product candidates and companion diagnostics. The Companyaccounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when theservice has been performed or when the goods have been received rather than when the payment is made. Research and development expenses consist of: · employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; · external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs,manufacturing organizations and consultants, including the scientific advisory board; · license fees; and · facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leaseholdimprovements and equipment, and laboratory and other supplies. Stock-based compensation The Company expenses the fair value of employee stock options over the requisite service period, which is the vesting period. Compensation expense ismeasured using the fair value of the award at the grant date, net of estimated forfeitures, and is adjusted annually to reflect actual forfeitures. The grant datefair value of each stock-based award is estimated using the Black-Scholes option valuation model and is expensed on a straight-line basis over the vestingperiod. Stock-based awards issued to nonemployees, including directors for non-board related services, are accounted for based on the fair value of such servicesreceived or of the equity instruments issued, whichever is more reliably measured. These stock-based option awards are revalued at each vesting date using thereceived or of the equity instruments issued, whichever is more reliably measured. These stock-based option awards are revalued at each vesting date using theBlack-Scholes option valuation model and are expensed on a straight-line basis over the vesting period. Prior to becoming a public company, the exercise prices for options granted were set by the board of directors, the members of which have extensive experiencein the life science industry, with input from management of the Company, based on the board’s determination of fair value of the common stock at the time ofthe grants. The Company performed contemporaneous valuations, utilizing a combination of valuation methods described in the American Institute ofCertified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, (Practice Aid). F-13Table of Contents Income taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted taxrates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a taxposition will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicates that it is considered morelikely than not that these benefits will not be realized. Net loss per share Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number ofcommon shares outstanding during the period, without consideration for common stock equivalents. The Company’s potentially dilutive shares, whichinclude redeemable convertible preferred stock, outstanding stock options and unvested restricted stock are considered to be common stock equivalents andare only included in the calculation of diluted net loss per share when their effect is dilutive. The following table reconciles net loss to net loss applicable tocommon shareholders (in thousands, except share and per share data): Year endedDecember 31,2011Period fromAugust 4,2010(inception)throughDecember 31,2010Period fromAugust 4,2010(inception) toDecember 31,2011 Net loss$(13,683)$(784)$(14,467)Accretion of redeemable convertible preferred stock(32)(2)(34)Net loss applicable to common stockholders$(13,715)$(786)$(14,501)Weighted-average number of common shares used in net loss per share applicable tocommon stockholders—basic and diluted1,2958501,171Net loss per share applicable to common stockholders—basic and diluted$(10.59)$(0.91)$(12.39) The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands): F-14Table of Contents Year endedDecember 31,2011Period fromAugust 4,2010(inception) toDecember 31,2010Period fromAugust 4,2010(inception) toDecember 31,2011 Preferred stock11,7411,14311,741Outstanding stock options405177405Unvested restricted stock1,4352,0091,435 Recent Accounting Pronouncements In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement.” This ASU clarifies the concepts related to highest and best use and valuationpremise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instrumentsclassified as a component of stockholders’ deficit. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements,the use of nonfinancial assets and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU areeffective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. The Company does notexpect the adoption of these provisions to have a significant impact on the financial statements. In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income.” This ASU intends to enhance comparability and transparency of othercomprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and thecomponents of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option topresent other comprehensive income components as part of the statement of changes in shareholder’s deficit. The provisions of this ASU will be appliedretrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. The Company does not expect the adoptionof this standard to have a significant impact on the financial statements, but it will impact the manner in which the Company reports comprehensive loss. 3. Property and equipment Property and equipment and related accumulated depreciation are as follows (in thousands): December 31,2011December 31,2010Laboratory equipment$721$8Computer equipment27—Furniture44—7928Less: accumulated depreciation(83)—$709$8 F-15Table of Contents Depreciation expense was $83,000 for the year ended December 31, 2011 and for the period from August 4, 2010 (inception) to December 31, 2011. TheCompany did not record any depreciation expense in the period from August 4, 2010 (inception) to December 31, 2010. 4. Redeemable convertible preferred stock In November 2010, the Company sold 4 million shares of Series A redeemable convertible preferred stock (Series A Preferred Stock) at a price of $1.00 pershare for gross proceeds of $4 million. In accordance with the terms of the Series A Stock Purchase Agreement, the Company sold an additional 12 millionshares at $1.00 per share in a second subsequent closing. The milestones necessary to achieve the subsequent closing were met in April 2011 and theCompany sold 12 million shares of Series A Preferred Stock for gross proceeds of $12 million. The Company incurred approximately $79,000 of issuancecosts as part of the first closing of the Series A Preferred Stock. No additional issuance costs were incurred as part of the second closing. In July 2011, the Company sold approximately 16 million shares of series B redeemable convertible preferred stock (Series B Preferred Stock) at a price of$2.00 per share for gross proceeds of approximately $32 million. The Company incurred approximately $113,000 of issuance costs as part of the closing ofthe Series B Preferred Stock. In November 2011, the Company sold approximately 9.1 million shares of Series C redeemable convertible preferred stock (Series C Preferred Stock) at aprice of $2.25 per share for gross proceeds of $20.4 million. The Company incurred approximately $153,000 of issuance costs as part of the closing of theSeries C Preferred Stock. The issuance costs associated with the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock(collectively, the Preferred Stock) are being accreted through the earliest redemption date. As described more fully in Note 13, “Subsequent Events,” the Company completed its initial public offering in February 2012 and all shares of its PreferredStock converted into 11,740,794 shares of common stock. The Company assessed the Preferred Stock for any beneficial conversion features or embedded derivatives that would require bifurcation from the PreferredStock and receive separate accounting treatment. On the date of each issuance, the value of the common stock into which the Preferred Stock is convertible hada fair value less than the effective conversion price of the Preferred Stock and, as such, there was no intrinsic value on the respective commitment dates. Noembedded derivatives were identified that would require bifurcation. The rights, preferences, and privileges of Preferred Stock are as follows: F-16Table of Contents Conversion Shares of Preferred Stock are convertible into common stock based on a defined conversion ratio, which is originally set at one-for-one, adjustable for certaindilutive events. Conversion is at the option of the holders of Preferred Stock (Preferred Stockholders) at anytime without any additional considerations,although conversion is automatic upon the earlier of the sale of shares of common stock to the public at a price of at least $10.50 per share, for gross proceedsof at least $35 million, and where the shares are traded on either the New York Stock Exchange or NASDAQ or upon the written consent of holders of at least60% of the outstanding Preferred Stock. During 2012, the Company’s stockholders approved a reduction in the per share price required for the automaticconversion of the Preferred Stock into common stock to the public from $10.50 per share to $8.75 per share. Dividends Prior to the payment of any dividend, except a common stock dividend, to the common stockholders, the Preferred Stockholders are entitled to receive anamount at least equal to the amount that would have been received by the Preferred Stockholders had all shares of Preferred Stock been converted to commonstock immediately prior to issuance of the dividend. Liquidation preference In the event of any liquidation, dissolution or winding up of the Company, including a deemed liquidation event, such as certain mergers or a disposition ofsubstantially all the assets of the Company, unless holders of at least 60% of the outstanding Preferred Stock elect otherwise, the Preferred Stockholders areentitled to receive, in preference to common stockholders, an amount equal to the Original Issue Price ($1.00 per share for Series A Preferred Stock, $2.00 pershare for Series B Preferred Stock and $2.25 per share for Series C Preferred Stock, adjustable for certain dilutive events) plus all declared but unpaiddividends. If the Company has insufficient assets to pay the Preferred Stockholders the full amount to which they are entitled, the Preferred Stockholdersshare ratably in any distribution in proportion to the respective amounts which would otherwise be payable. After payment of these preferential amounts, the remaining assets of the Company are distributable ratably to the holders of common stock and PreferredStock on an as-converted to common basis. However, the Preferred Stockholders are limited to the receipt of an aggregate amount (including through paymentof the preferential amounts described above) equal to the greater of: (1) 1.75 times the aggregate amount of the applicable Original Purchase Price, and (2) the amount the Preferred Stockholder would have received if all Preferred Stock had been converted to common stock immediately prior to theliquidation event. Voting rights Holders of the Preferred Stock are entitled to vote as a single class with the holders of common stock, and have one vote for each equivalent common share intowhich the Preferred Stock is convertible. A 60% vote of the Preferred Stockholders in addition to a 60% vote of Series A F-17Table of Contents Preferred Stock and Series B Preferred Stock voting as a single class, is required in order to effect a liquidation, reclassification or recapitalization of theCompany’s capital stock or a deemed liquidation event, such as certain mergers or a disposition of substantially all the assets of the Company, amend thecertificate of incorporation or bylaws, create or issue shares of another class of stock that is pari passu or senior to the Preferred Stock, repurchase or redeemor pay any dividend on any capital stock, subject to limited exceptions, issue any debt security such that the Company’s aggregate indebtedness would exceed$1 million, acquire capital stock of another entity, increase or decrease the authorized number of directors or increase the number of shares of common stockreserved under the Company’s equity incentive plan. The holders of the Series A Preferred Stock are entitled to elect four directors, the Preferred Stockholdersand common stockholders, voting as one class on an as-converted basis, are entitled to elect two directors, and the common stockholders are entitled to electone director. Redemption The Preferred Stock is redeemable at the applicable Original Issue Price plus any declared but unpaid dividends. The Series C Preferred Stock is redeemablebeginning in 2016 at the demand of specific holders of the Series C Preferred Stock. The Series B Preferred Stock is redeemable beginning in 2016 at thedemand of holders of at least two-thirds of the Series B Preferred Stock. The Series A Preferred Stock is redeemable upon the redemption of another series ofPreferred Stock at the demand of holders of at least two-thirds of the Series A Preferred Stock. The redemption for the Preferred Stock is payable in three equalannual installments. 5. Common stock As of December 31, 2011 and December 31, 2010, the Company had reserved the following shares of common stock for the potential conversion ofoutstanding Preferred Stock and the exercise of stock options (in thousands): December 31,2011December 31,2010 Series A Preferred Stock4,5714,571Series B Preferred Stock4,579—Series C Preferred Stock2,591—Shares reserved under equity compensation plans56340512,3044,976 Each share of common stock is entitled to one vote, subject to certain voting rights of the Preferred Stock as discussed in Note 4. The holders of the commonstock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the prior rights of thePreferred Stockholders. F-18Table of Contents Common stock issued for license The Company issued 166,664 shares of common stock in the period from August 4, 2010 (inception) to December 31, 2010 and in the period from August 4,2010 (inception) to December 31, 2011 in exchange for certain intellectual property rights. The fair value of the common stock was determined to be $0.28 pershare and the fair value was determined to be more readily determinable than the fair value of the license. As a result, the fair value of the shares ofapproximately $46,000 was recorded as research and development expense. 6. Stock-based compensation In November 2010, the Company adopted the Verastem, Inc. 2010 Equity Incentive Plan (the 2010 Plan) under which it may grant incentive stock options(ISOs), nonstatutory stock options (NSOs), restricted stock awards, restricted stock unit awards and stock appreciation rights to purchase up to404,762 shares of common stock to eligible employees, officers, directors and consultants. In March 2011, the Company increased the number of shares ofcommon stock available under the 2010 Plan to 571,242 shares. As of December 31, 2011, 30,101 shares are available for future issuance under the 2010Plan. Terms of stock option agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2010 Plan.Generally, options granted by the Company vest over four years, expire no later than ten years from the date of grant and have an exercise price equal to theestimated fair value of the common stock as determined by the board of directors on the date of grant. In December 2011, the Company adopted the 2012 Incentive Plan (the 2012 Plan). The 2012 Plan became effective immediately upon the closing of theCompany’s IPO in February 2012. The 2012 Plan provides for the grant of ISOs, NSOs, stock appreciation rights, restricted stock awards, restricted stockunits and other stock-based and cash awards. Upon effectiveness, the number of shares of common stock that are reserved under the 2012 Plan is the sum of3,428,571 shares plus the number of shares available under the 2010 Plan. The number of shares reserved under the 2012 Plan is increased by the numberof shares of common stock (up to a maximum of 571,242 shares) subject to outstanding awards under the 2010 Plan that expire, terminate or are otherwisesurrendered, cancelled, forfeited or repurchased. The 2012 Plan includes an “evergreen provision” that allows for an annual increase in the number of sharesof common stock available for issuance under the 2012 Plan. The annual increase will be added on the first day of each year beginning in 2013 and eachsubsequent anniversary until the expiration of the 2012 Plan, equal to the lowest of 1,285,714 shares of common stock, 4.0% of the number of shares ofcommon stock outstanding and an amount determined by the board of directors. Restricted common stock In August 2010, the Company issued 2.9 million shares of its common stock to the founders at a purchase price of $0.00035 per share, determined to be thefair value of the common stock on the date of issuance. The shares were issued under restricted stock purchase agreements, which allow the Company, at itsdiscretion, to repurchase unvested shares if the founders terminate their relationship with the Company. Upon execution of the restricted stock purchaseagreements, 25% of the shares vested immediately and the remaining shares vest ratably on a quarterly basis over a four year term. F-19Table of Contents During the year ended December 31, 2011, the Company issued 256,000 shares of its common stock to new employees of the Company at a purchase price of$0.28 per share, determined to be the fair value of the common stock on the date of issuance. The shares were issued under the terms of the Plan, and allowthe Company, at its discretion, to repurchase unvested shares if the employees terminate their relationship with the Company. The shares vest over a four yearterm, with 25% vesting after the first year and the remainder vesting ratably on a monthly basis for the remaining three years. The purchase price received forthe shares was not material to the financial statements. The shares are recorded in stockholders deficit as they vest. The Company records stock-based compensation expense for the common stock subject to repurchase based on the grant date intrinsic value for employeesand the vesting date intrinsic value for non-employees. All of the restricted shares were issued at fair value. The Company has recorded stock-basedcompensation expense of $1.4 million, $51,000 and $1.5 million for the year ended December 31, 2011, for the period from August 4, 2010 (inception) toDecember 31, 2010 and for the period from August 4, 2011 (inception) to December 31, 2011, respectively, associated with restricted common stock. The$1.4 million recorded for the year ended December 31, 2011 includes $34,000 associated with modifications to certain restricted stock purchase agreements. A summary of the Company’s restricted stock activity and related information is as follows (in thousands, except per share data): SharesWeighted-averagepurchaseprice pershareOutstanding at August 4, 2010—$—Granted2,8570.00035Vested(848)0.00035Outstanding at December 31, 20102,0090.00035Granted2560.2800Vested(544)0.0045Forfeited(286)0.1173Outstanding at December 31, 20111,4350.0253 Stock options A summary of the Company’s stock option activity and related information follows (in thousands, except per share data): F-20Table of Contents SharesWeighted-averagepriceper shareWeighted-averageremainingcontractualterm (years)AggregateintrinsicvalueOutstanding at August 4, 2010—$—Granted1770.28Outstanding at December 31, 20101770.289.9$12Granted2281.12Outstanding at December 31, 20114050.759.3$176Exercisable at December 31, 2010—$0.289.9$12Exercisable at December 31, 201146$0.288.9$—Vested and expected to vest at December 31, 2010177$0.289.9$12Vested and expected to vest at December 31, 2011405$0.759.3$176 The fair value of each stock-based award is estimated on the grant date using the Black-Scholes option-pricing model using the following assumptions: Year ended December 31,20112010 Risk-free interest rate1.1-2.7%2.0%Dividend yield——Volatility69-70%67%Expected term (years)6.0-6.16.1 The Company uses the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-BasedPayment, to calculate the expected term as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expectedterm for options granted to employees and utilizes the contractual term for options granted to non-employees. The expected term is applied to the stock optiongrant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population.The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to us, includingearly stage of product development and therapeutic focus. The representative group of companies consisted of Alnylam Pharmaceuticals, Inc., AnadysPharmaceuticals, Inc., ARIAD Pharmaceuticals, Inc., Curis Inc., Cytokinetics, Inc., Exelixis, Inc., Geron, Corp., Infinity Pharmaceuticals, Inc., MomentaPharmaceuticals, Inc. and Oncothyreon, Inc. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of thestock options. Management estimates expected forfeitures based on data from a representative group of companies with similar characteristics to us andrecognizes compensation costs only for those equity awards expected to vest. For the period from August 4, 2010 (inception) to December 31, 2010, the Company did not recognize any stock-based compensation for employee stockoption grants. The Company recognized total stock-based compensation expense for employee stock option grants of $19,000 F-21Table of Contents in the year ended December 31, 2011 and the period from August 4, 2010 (inception) to December 31, 2011. The weighted-average grant date fair value ofoptions granted in the period from August 4, 2010 (inception) to December 31, 2010, the year ended December 31, 2011 and the period from August 4, 2010(inception) to December 31, 2011 was $0.18, $0.75 and $0.60 per share, respectively. Stock-based awards issued to nonemployees, including directors for non-board related services, are accounted for using the fair value method. These stock-based option awards are revalued on each vesting and reporting date. The Company recognized total stock-based compensation expense of approximately$209,000, $1,000, and $210,000 in the year ended December 31, 2011, the period from August 4, 2010 (inception) to December 31, 2010, and the periodfrom August 4, 2010 (inception) to December 31, 2011, respectively. Due to an operating loss, the Company does not record tax benefits associated with stock-based compensation and option exercises. Tax benefits will be recorded when realized. At December 31, 2011, there was $810,000 of total unrecognized compensation cost related to nonvested stock options, respectively. As of December 31,2011, the Company expects to recognize these costs over a remaining weighted-average period of 2.9 years. 7. Income taxes As of December 31, 2011 the Company had federal net operating loss carryforwards of approximately $11.6 million and state net operating losscarryforwards of $11.9 million, which are available to reduce future taxable income. The Company also had federal tax credits of $358,000 and state taxcredits of $42,000, which may be used to offset future tax liabilities. The net operating loss (NOL) and tax credit carryforwards will expire at various datesthrough 2031. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state taxauthorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders overa three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limitthe amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determinedbased on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in futureyears. A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows: F-22Table of Contents Year endedDecember 31,20112010Income tax benefit using U.S. federal statutory rate34.00%34.00%State income taxes, net of federal benefit4.78%5.62%Research and development tax credits1.65%1.96%Permanent items(4.78)%(0.78)%Change in the valuation allowance(35.65)%(40.80)%Other—%—%—%—% The principal components of the Company’s deferred tax assets are as follows (in thousands): December 31,20112010Deferred tax assets:Net operating loss carryforwards$4,562$225Capitalized research and development14855Research and development credits38518Stock-based compensation8220Other202Gross deferred tax assets5,197320Valuation allowance(5,197)(320)Net deferred tax asset$—$— The Company has recorded a valuation allowance against its deferred tax assets at December 31, 2011 because the Company’s management believes that it ismore likely than not that these assets will not be fully realized. The increase in the valuation allowance of $4.9 million in 2011 primarily relates to the net lossincurred by the Company. Upon inception, the Company adopted accounting guidance related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes arebased on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realizedfollowing resolution of any potential contingencies present related to the tax benefit. Upon adoption, the Company recognized no material adjustment forunrecognized income tax benefits. As of the adoption date and through December 31, 2011, the Company had no unrecognized tax benefits or related interestand penalties accrued. The Company has not, as yet, conducted a study of research and development (R&D) credit carryforwards. This study may result inan adjustment to the Company’s R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are beingpresented as an uncertain tax position. A full valuation allowance has been provided against the Company’s R&D credits and, if an adjustment is required,this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations ifan adjustment were required. The Company would recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. TheCompany’s uncertain tax positions are related to years that remain subject to examination by relevant tax authorities. Since the Company is in a losscarryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which aloss carryforward is available. F-23Table of Contents 8. Commitments and contingencies From November 2010 through May 2011, the Company leased office space from a shareholder. There was no formal lease arrangement with the shareholder.Rent paid to the shareholder was $34,000, $12,000, and $46,000 for the year ended December 31, 2011, the period from August 4, 2010 (inception) toDecember 31, 2010, and the period from August 4, 2010 (inception) to December 31, 2011, respectively. In May 2011, the Company entered into a non-cancelable operating lease for office and laboratory space, which expires October 31, 2014. The lease agreementprovides for free rent for the first four months of the lease term and includes escalating rent payments. The rent expense is recorded on a straight-line basis overthe lease term. The Company is also obligated to pay for certain operating costs and a proportional share of certain common area costs. The Company has theright to extend the lease for a two-year period. The annual rent for each additional year is determined annually at the then fair market rate. The Companysecured a letter of credit for $86,000 in connection with the lease, which is included in restricted cash on the balance sheet. The minimum aggregate futurelease commitments are as follows (in thousands): 2012$35120133602014307$1,018 The Company recorded rent expense of $251,000, $12,000 and $263,000 for the year ended December 31, 2011, the period from August 4, 2010 (inception)to December 31, 2010, and the period from August 4, 2010 (inception) to December 31, 2011, respectively. 9. Accrued expenses Accrued expenses consist of the following (in thousands): December 31,20112010 Professional fees$520$35Contract research organizations217—Compensation and related benefits8615Deferred rent27—License fees—30Other expenses239$873$89 10. License agreements In October 2010, the Company entered into an exclusive license agreement, which was amended and restated in January 2012, with the Whitehead Institute forBiomedical Research (the F-24Table of Contents Licensor) for certain intellectual property. The Company paid the Licensor an upfront license fee and reimbursed patent related fees and costs incurred by theLicensor and affiliates of the Licensor totaling $104,000 in the aggregate and issued 166,664 shares of common stock to the Licensor and entities andindividuals affiliated with the Licensor. The fair value of the common stock was determined to be $0.28 per share, and the fair value was determined to bemore readily determinable than the fair value of the license. As a result, the fair value of the shares of approximately $46,000 was recorded as research anddevelopment expense. Under the terms of the agreement, the Company also agreed to pay annual license maintenance fees, milestone payments, royalties as apercentage of net sales and a percentage of sublicense income the Company receives. Annual license maintenance fees are creditable against royalties earnedduring the same calendar year and are not material to the financial statements. Milestone payments are triggered upon the achievement of specifieddevelopment, regulatory and commercialization milestones and are not creditable against royalties. Actual amounts due under the agreement will varydepending on the number of products developed, the type and development path of the products, and other related factors. Milestone payments could total upto $1.6 million. The Company may terminate the agreement at any time with 90 days’ prior written notice. On November 17, 2011, the Company entered into an exclusive, worldwide license agreement with Poniard Pharmaceuticals, Inc. to develop, make, use andsell compounds and products covered by the licensed patent rights for the diagnosis, treatment, prevention or control of human diseases and conditions.Under the agreement, the Company paid an upfront license fee and agreed to pay $13.3 million upon the achievement of specified development and regulatorymilestones. The Company also agreed to issue to Poniard a warrant to purchase 142,857 shares of common stock upon the first dosing of the first patient in aPhase 1 clinical trial of a licensed product. The exercise price of such warrant would be equal to the average closing price of the Company’s common stockduring the five trading days preceding such issue date. In addition, the Company agreed to pay royalties as a percentage of net sales of licensed products. TheCompany may terminate the agreement at any time with 90 days’ prior written notice. On December 16, 2011, the Company amended and restated an existing non-exclusive license agreement with the Licensor pursuant to which the Companyobtained an exclusive license to certain intellectual property. The Company paid the Licensor an upfront license fee and agreed to make milestone payments ofup to $825,000 upon the achievement of specified regulatory and commercialization milestones. In addition, the Company agreed to pay royalties as apercentage of net sales of licensed products. 11. Employee benefit plan In June 2011, the Company adopted a 401(k) retirement and savings plan (the 401(k) Plan) covering all employees. The 401(k) Plan allows employees to makepre-tax contributions up to the maximum allowable amount set by the IRS. Under the 401(k) Plan, the Company may make discretionary contributions asapproved by the board of directors. During the year ended December 31, 2011 and the period from August 4, 2010 (inception) to December 31, 2011, theCompany made contributions to the 401(k) Plan of $46,000. F-25Table of Contents 12. Quarterly Financial Information (unaudited, in thousands, except per share data) First QuarterEndedMarch 31,2011Second QuarterEndedJune 30,2011Third QuarterEndedSeptember 30,2011Fourth QuarterEndedDecember 31,2011Operating expenses:Research and development$675$1,726$3,082$4,400General and administrative4717599651,620 Total operating expenses1,1462,4854,0476,020Loss from operations(1,146)(2,485)(4,047)(6,020)Interest income———15 Net loss$(1,146)$(2,485)$(4,047)$(6,005) Net loss per share applicable to common stockholders-basic anddiluted$(1.06)$(2.03)$(2.98)$(4.01)Weighted average number of common shares used in net loss pershare applicable to common stockholders-basic and diluted1,0891,2251,3611,500 Period fromAugust 4, 2010(inception) toSeptember 30,2010Fourth QuarterEndedDecember 31,2010Operating expenses:Research and development$—$400General and administrative84300 Total operating expenses84700Loss from operations(84)(700)Interest income—— Net loss$(84)$(700) Net loss per share applicable to common stockholders-basic and diluted$(0.12)$(0.77)Weighted average number of common shares used in net loss per shareapplicable to common stockholders-basic and diluted714924 The Company was incorporated on August 4, 2010; however, it did not commence operations until the fourth quarter of 2010. Activity incurred during theperiod from August 4, 2010 (inception) to September 30, 2010 is limited to organizational costs which were expensed when incurred. F-26Table of Contents 13. Subsequent events The Company reviews all activity subsequent to year end but prior to the issuance of the financial statements for events that could require disclosure or thatcould impact the carrying value of assets or liabilities as of the balance sheet date. All significant subsequent events have been properly disclosed in thefinancial statements. In January 2012, the Company’s stockholders approved a reduction in the per share price required for the automatic conversion of the Preferred Stock intocommon stock upon the sale of shares of common stock to the public from $10.50 per share to $8.75 per share. In February 2012, the Company closed the initial public offering (IPO) of its common stock pursuant to a registration statement on Form S-1, as amended. An aggregate of 6,325,000 shares of common stock registered under the registration statement were sold at a price of $10.00 per share, including the over-allotment option. Net proceeds of the IPO were $56.7 million. In conjunction with this transaction, all shares of the Company’s Preferred Stock wereconverted into 11,740,794 shares of common stock. F-27Table of Contents EXHIBIT INDEX ExhibitnumberDescription of exhibit3.1*Amended and Restated Certificate of Incorporation, as amended, of the Registrant3.2Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)4.2Second Amended and Restated Investors’ Rights Agreement, dated November 1, 2011, by and among the Registrant and the other partiesthereto (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed bythe Registrant on January 13, 2012)10.1#2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 333-177677) filed bythe Registrant on November 3, 2011)10.2#2012 Incentive Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)10.3#Form of Incentive Stock Option Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.3 to Amendment No. 3 to theRegistration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)10.4#Form of Nonqualified Stock Option Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.4 to Amendment No. 3 to theRegistration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)10.5#Form of Restricted Stock Unit Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.16 to Amendment No. 3 to theRegistration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)10.6#Amended and Restated Employment Agreement between the Registrant and Robert Forrester (incorporated by reference to Exhibit 10.5 toAmendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)10.7#Amended and Restated Employment Agreement between the Registrant and Jonathan Pachter (incorporated by reference to Exhibit 10.6 toAmendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)10.8#Form of Indemnification Agreement between the Registrant and each director (incorporated by reference to Exhibit 10.7 to Amendment No. 1 tothe Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on December 7, 2011)10.9Lease Agreement, dated May 2, 2011, between the Registrant and ARE-MA Region No. 38, LLC (incorporated by reference to Exhibit 10.8 tothe Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011)10.10†Amended and Restated Exclusive Patent License Agreement and Tangible Property Agreement, dated January 11, 2012, by and among theRegistrant and the Whitehead Table of Contents Institute for Biomedical Research (incorporated by reference to Exhibit 10.9 to Amendment No. 3 to the Registration Statement on Form S-1(File No. 333-177677) filed by the Registrant on January 13, 2012)10.11†Exclusive Patent License Agreement, dated December 16, 2011, by and among the Registrant and the Whitehead Institute for BiomedicalResearch (incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-177677)filed by the Registrant on December 22, 2011)10.12License Agreement, dated November 17, 2011, between the Registrant and Poniard Pharmaceuticals, Inc. (incorporated by reference toExhibit 10.15 to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on December 22,2011)10.13†Letter Agreement, dated October 1, 2010, between the Registrant and the Broad Institute (incorporated by reference to Exhibit 10.11 to theRegistration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011)10.14#Letter Agreement, dated July 30, 2010, as amended October 18, 2010, between the Registrant and Piyush Gupta, Ph.D. (incorporated byreference to Exhibit 10.12 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011)10.15#Letter Agreement, dated August 20, 2010, between the Registrant and Eric Lander, Ph.D. (incorporated by reference to Exhibit 10.13 to theRegistration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011)10.16#Letter Agreement, dated July 30, 2010, as amended October 18, 2010, between the Registrant and Robert Weinberg, Ph.D. (incorporated byreference to Exhibit 10.14 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on November 3, 2011)10.17*#Restricted Stock Purchase Agreement, dated August 11, 2010, between the Registrant and Christoph Westphal10.18*#Restricted Stock Purchase Agreement, dated August 11, 2010, between the Registrant and Richard Aldrich10.19*#Employment Agreement, dated March 28, 2012, between the Registrant and Paul Brannelly31.1*Certification of President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)31.2*Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)32.1*Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.32.2*Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. * Filed herewith.† Confidential treatment granted as to portions of the exhibit. Confidential materials omitted and filed separately with the Securities and ExchangeCommission.# Management contract or compensatory plan, contract or agreement. Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF VERASTEM, INC. Verastem, Inc. (the “Corporation”), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of theState of Delaware, does hereby certify as follows: The current name of the Corporation is Verastem, Inc. The original Certificate of Incorporation was filed with the Secretary of State of the State ofDelaware on August 4, 2010. The Certificate of Incorporation was amended and restated on November 1, 2011 and was amended on November 15, 2011 andJanuary 5, 2012. A resolution was duly adopted by the Board of Directors of the Corporation pursuant to Sections 242 and 245 of the General Corporation Law of theState of Delaware setting forth this Restated Certificate of Incorporation and declaring such Restated Certificate of Incorporation advisable. The stockholdersof the Corporation duly approved and adopted this Restated Certificate of Incorporation by written consent in accordance with Sections 228, 242 and 245 ofthe General Corporation Law of the State of Delaware. Accordingly, the Certificate of Incorporation of this Corporation, as previously amended and restated, is hereby further amended and restated in itsentirety to read as follows: FIRST: The name of the Corporation is Verastem, Inc. SECOND: The address of the Corporation’s registered office in the State of Delaware is United Corporate Services, Inc., 874 Walker Road, SuiteC, in the City of Dover, County of Kent, Delaware 19904. The name of its registered agent at that address is United Corporate Services, Inc. THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for whichcorporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 105,000,000 shares, consistingof (i) 100,000,000 shares of Common Stock, $.0001 par value per share (“Common Stock”), and (ii) 5,000,000 shares of Preferred Stock, $.0001 par valueper share (“Preferred Stock”). The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof inrespect of each class of capital stock of the Corporation. A COMMON STOCK. 1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of theholders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2. Voting. The holders of the Common Stock shall have voting rights at all meetings of stockholders, each such holder being entitled to onevote for each share thereof held by such holder; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitledto vote on any amendment to this Certificate of Incorporation (which, as used herein, shall mean the certificate of incorporation of the Corporation, as amendedfrom time to time, including the terms of any certificate of designations of any series of Preferred Stock) that relates solely to the terms of one or moreoutstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or moreother such series, to vote thereon pursuant to this Certificate of Incorporation. There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) bythe affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the GeneralCorporation Law of the State of Delaware. 3. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determinedby the Board of Directors and subject to any preferential dividend or other rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will beentitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential or other rights of any then outstandingPreferred Stock. B PREFERRED STOCK. Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in theresolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares ofPreferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connectionwith the creation of any such series, by adopting a resolution or resolutions providing for the issuance of the shares thereof and by filing a certificate ofdesignations relating thereto in accordance with the General Corporation Law of the State of Delaware, to determine and fix the number of shares of such seriesand such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights,and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, 2 redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by theGeneral Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series ofPreferred Stock may provide that such series shall be superior or rank equally or be junior to any other series of Preferred Stock to the extent permitted by law. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares then outstanding) by theaffirmative vote of the holders of a majority of the voting power of the capital stock of the Corporation entitled to vote thereon, voting as a single class,irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware. FIFTH: Except as otherwise provided herein, the Corporation reserves the right to amend, alter, change or repeal any provision contained in thisCertificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred uponstockholders herein are granted subject to this reservation. SIXTH: In furtherance and not in limitation of the powers conferred upon it by the General Corporation Law of the State of Delaware, and subject tothe terms of any series of Preferred Stock, the Board of Directors shall have the power to adopt, amend, alter or repeal the Bylaws of the Corporation by theaffirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. Thestockholders may not adopt, amend, alter or repeal the Bylaws of the Corporation, or adopt any provision inconsistent therewith, unless such action isapproved, in addition to any other vote required by this Certificate of Incorporation, by the affirmative vote of the holders of at least seventy-five percent (75%)of the votes that all the stockholders would be entitled to cast in any annual election of directors or class of directors. Notwithstanding any other provisions oflaw, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, theaffirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election ofdirectors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article SIXTH. SEVENTH: Except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination or limitation of liability ofdirectors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damagesfor any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provisionshall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of suchdirector occurring prior to such amendment or repeal. If the General Corporation Law of the State of Delaware is amended to permit further elimination orlimitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted bythe General Corporation Law of the State of Delaware as so amended. 3 EIGHTH: The Corporation shall provide indemnification as follows: 1. Actions, Suits and Proceedings Other than by or in the Right of the Corporation. The Corporation shall indemnify each person who wasor is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative orinvestigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was, or has agreed to become, a director orofficer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of,or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such personsbeing referred to hereafter as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses(including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee Retirement Income SecurityAct of 1974), and amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with such action, suit orproceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, thebest interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, ofitself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the bestinterests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. 2. Actions or Suits by or in the Right of the Corporation. The Corporation shall indemnify any Indemnitee who was or is a party to orthreatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor byreason of the fact that Indemnitee is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at therequest of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture,trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against allexpenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by or on behalf ofIndemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemniteereasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made under this Section 2 inrespect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless, and only to the extent, that theCourt of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of suchliability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses (including attorneys’ fees)which the Court of Chancery of Delaware or such other court shall deem proper. 3. Indemnification for Expenses of Successful Party. Notwithstanding any other provisions of this Article EIGHTH, to the extent that anIndemnitee has been successful, on the 4 merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article EIGHTH, or in defense of any claim, issue ormatter therein, or on appeal from any such action, suit or proceeding, Indemnitee shall be indemnified against all expenses (including attorneys’ fees) actuallyand reasonably incurred by or on behalf of Indemnitee in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of,on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to Indemnitee, (ii) an adjudication thatIndemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by Indemnitee, (iv) an adjudication that Indemnitee did not act in good faithand in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding,an adjudication that Indemnitee had reasonable cause to believe his or her conduct was unlawful, Indemnitee shall be considered for the purposes hereof tohave been wholly successful with respect thereto. 4. Notification and Defense of Claim. As a condition precedent to an Indemnitee’s right to be indemnified, such Indemnitee must notify theCorporation in writing as soon as practicable of any action, suit, proceeding or investigation involving such Indemnitee for which indemnity will or could besought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participatetherein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to Indemnitee. After notice from theCorporation to Indemnitee of its election so to assume such defense, the Corporation shall not be liable to Indemnitee for any legal or other expensessubsequently incurred by Indemnitee in connection with such action, suit, proceeding or investigation, other than as provided below in this Section 4. Indemnitee shall have the right to employ his or her own counsel in connection with such action, suit, proceeding or investigation, but the fees and expenses ofsuch counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employmentof counsel by Indemnitee has been authorized by the Corporation, (ii) counsel to Indemnitee shall have reasonably concluded that there may be a conflict ofinterest or position on any significant issue between the Corporation and Indemnitee in the conduct of the defense of such action, suit, proceeding orinvestigation or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, suit, proceeding or investigation, in each ofwhich cases the fees and expenses of counsel for Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this ArticleEIGHTH. The Corporation shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of theCorporation or as to which counsel for Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. The Corporation shall not berequired to indemnify Indemnitee under this Article EIGHTH for any amounts paid in settlement of any action, suit, proceeding or investigation effectedwithout its written consent. The Corporation shall not settle any action, suit, proceeding or investigation in any manner which would impose any penalty orlimitation on Indemnitee without Indemnitee’s written consent. Neither the Corporation nor Indemnitee will unreasonably withhold or delay its consent to anyproposed settlement. 5. Advance of Expenses. Subject to the provisions of Section 6 of this Article EIGHTH, in the event of any threatened or pending action,suit, proceeding or investigation of which the Corporation receives notice under this Article EIGHTH, any expenses (including attorneys’ fees) incurred by oron behalf of Indemnitee in defending an action, suit, proceeding 5 or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter; provided, however, that thepayment of such expenses incurred by or on behalf of Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of anundertaking by or on behalf of Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined by final judicial decision fromwhich there is no further right to appeal that Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article EIGHTH; andprovided further that no such advancement of expenses shall be made under this Article EIGHTH if it is determined (in the manner described in Section 6)that (i) Indemnitee did not act in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, or(ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe his or her conduct was unlawful. Such undertaking shall beaccepted without reference to the financial ability of Indemnitee to make such repayment. 6. Procedure for Indemnification and Advancement of Expenses. In order to obtain indemnification or advancement of expenses pursuant toSection 1, 2, 3 or 5 of this Article EIGHTH, an Indemnitee shall submit to the Corporation a written request. Any such advancement of expenses shall bemade promptly, and in any event within 60 days after receipt by the Corporation of the written request of Indemnitee, unless (i) the Corporation has assumedthe defense pursuant to Section 4 of this Article EIGHTH (and none of the circumstances described in Section 4 of this Article EIGHTH that would nonethelessentitle the Indemnitee to indemnification for the fees and expenses of separate counsel have occurred) or (ii) the Corporation determines within such 60-dayperiod that Indemnitee did not meet the applicable standard of conduct set forth in Section 1, 2 or 5 of this Article EIGHTH, as the case may be. Any suchindemnification, unless ordered by a court, shall be made with respect to requests under Section 1 or 2 only as authorized in the specific case upon adetermination by the Corporation that the indemnification of Indemnitee is proper because Indemnitee has met the applicable standard of conduct set forth inSection 1 or 2, as the case may be. Such determination shall be made in each instance (a) by a majority vote of the directors of the Corporation consisting ofpersons who are not at that time parties to the action, suit or proceeding in question (“disinterested directors”), whether or not a quorum, (b) by a committee ofdisinterested directors designated by majority vote of disinterested directors, whether or not a quorum, (c) if there are no disinterested directors, or if thedisinterested directors so direct, by independent legal counsel (who may, to the extent permitted by law, be regular legal counsel to the Corporation) in a writtenopinion, or (d) by the stockholders of the Corporation. 7. Remedies. The right to indemnification or advancement of expenses as granted by this Article EIGHTH shall be enforceable by Indemniteein any court of competent jurisdiction. Neither the failure of the Corporation to have made a determination prior to the commencement of such action thatindemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporationpursuant to Section 6 of this Article EIGHTH that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create apresumption that Indemnitee has not met the applicable standard of conduct. In any suit brought by Indemnitee to enforce a right to indemnification, orbrought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall have the burden of provingthat Indemnitee is not entitled to be indemnified, or to such advancement of expenses, 6 under this Article EIGHTH. Indemnitee’s expenses (including attorneys’ fees) reasonably incurred in connection with successfully establishing Indemnitee’sright to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. Notwithstanding the foregoing, in any suitbrought by Indemnitee to enforce a right to indemnification hereunder it shall be a defense that the Indemnitee has not met any applicable standard forindemnification set forth in the General Corporation Law of the State of Delaware. 8. Limitations. Notwithstanding anything to the contrary in this Article EIGHTH, except as set forth in Section 7 of this Article EIGHTH,the Corporation shall not indemnify an Indemnitee pursuant to this Article EIGHTH in connection with a proceeding (or part thereof) initiated by suchIndemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. Notwithstanding anything to the contrary in this ArticleEIGHTH, the Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of insurance, and in the event theCorporation makes any indemnification payments to an Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of insurance, suchIndemnitee shall promptly refund indemnification payments to the Corporation to the extent of such insurance reimbursement. 9. Subsequent Amendment. No amendment, termination or repeal of this Article EIGHTH or of the relevant provisions of the GeneralCorporation Law of the State of Delaware or any other applicable laws shall adversely affect or diminish in any way the rights of any Indemnitee toindemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions orfacts occurring prior to the final adoption of such amendment, termination or repeal. 10. Other Rights. The indemnification and advancement of expenses provided by this Article EIGHTH shall not be deemed exclusive of anyother rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement orvote of stockholders or disinterested directors or otherwise, both as to action in Indemnitee’s official capacity and as to action in any other capacity whileholding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate,heirs, executors and administrators of Indemnitee. Nothing contained in this Article EIGHTH shall be deemed to prohibit, and the Corporation is specificallyauthorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth in this ArticleEIGHTH. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to otheremployees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth inthis Article EIGHTH. 11. Partial Indemnification. If an Indemnitee is entitled under any provision of this Article EIGHTH to indemnification by the Corporation forsome or a portion of the expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under theEmployee Retirement Income Security Act of 1974) or amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connectionwith any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall neverthelessindemnify Indemnitee for the portion of 7 such expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee RetirementIncome Security Act of 1974) or amounts paid in settlement to which Indemnitee is entitled. 12. Insurance. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee oragent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) against any expense,liability or loss incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the powerto indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. 13. Savings Clause. If this Article EIGHTH or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction,then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including attorneys’ fees), liabilities, losses, judgments, fines(including excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974) and amounts paid in settlement in connection withany action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullestextent permitted by any applicable portion of this Article EIGHTH that shall not have been invalidated and to the fullest extent permitted by applicable law. 14. Definitions. Terms used herein and defined in Section 145(h) and Section 145(i) of the General Corporation Law of the State of Delawareshall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i). NINTH: This Article NINTH is inserted for the management of the business and for the conduct of the affairs of the Corporation. 1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. 2. Number of Directors; Election of Directors. Subject to the rights of holders of any series of Preferred Stock to elect directors, the numberof directors of the Corporation shall be established by the Board of Directors. Election of directors need not be by written ballot, except as and to the extentprovided in the Bylaws of the Corporation. 3. Classes of Directors. Subject to the rights of holders of any series of Preferred Stock to elect directors, the Board of Directors shall be andis divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the totalnumber of directors constituting the entire Board of Directors. The Board of Directors is authorized to assign members of the Board of Directors already inoffice to Class I, Class II or Class III at the time such classification becomes effective. 4. Terms of Office. Subject to the rights of holders of any series of Preferred Stock to elect directors, each director shall serve for a termending on the date of the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided thateach director initially assigned to Class I shall serve for a term expiring at 8 the Corporation’s first annual meeting of stockholders held after the effectiveness of this Certificate of Incorporation; each director initially assigned to Class IIshall serve for a term expiring at the Corporation’s second annual meeting of stockholders held after the effectiveness of this Certificate of Incorporation; andeach director initially assigned to Class III shall serve for a term expiring at the Corporation’s third annual meeting of stockholders held after the effectivenessof this Certificate of Incorporation; provided further, that the term of each director shall continue until the election and qualification of his or her successor andbe subject to his or her earlier death, resignation or removal. 5. Quorum. The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors fixed pursuant toSection 2 of this Article NINTH shall constitute a quorum of the Board of Directors. If at any meeting of the Board of Directors there shall be less than such aquorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until aquorum shall be present. 6. Action at Meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum ispresent shall be regarded as the act of the Board of Directors unless a greater number is required by law or by this Certificate of Incorporation. 7. Removal. Subject to the rights of holders of any series of Preferred Stock, directors of the Corporation may be removed only for cause andonly by the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annualelection of directors or class of directors. 8. Vacancies. Subject to the rights of holders of any series of Preferred Stock, any vacancy or newly created directorship in the Board ofDirectors, however occurring, shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remainingdirector and shall not be filled by the stockholders. A director elected to fill a vacancy shall hold office until the next election of the class for which suchdirector shall have been chosen, subject to the election and qualification of a successor and to such director’s earlier death, resignation or removal. 9. Stockholder Nominations and Introduction of Business, Etc. Advance notice of stockholder nominations for election of directors andother business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided by the Bylaws of the Corporation. 10. Amendments to Article. Notwithstanding any other provisions of law, this Certificate of Incorporation or the Bylaws of the Corporation,and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of thevotes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or toadopt any provision inconsistent with, this Article NINTH. 9 TENTH: Stockholders of the Corporation may not take any action by written consent in lieu of a meeting. Notwithstanding any other provisions oflaw, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, theaffirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election ofdirectors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article TENTH. ELEVENTH: Special meetings of stockholders for any purpose or purposes may be called at any time by only the Board of Directors, theChairman of the Board or the Chief Executive Officer, and may not be called by any other person or persons. Business transacted at any special meeting ofstockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. Notwithstanding any other provisions of law, thisCertificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmativevote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors orclass of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article ELEVENTH. IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which restates, integrates and amends the certificate of incorporation of theCorporation, and which has been duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, hasbeen executed by its duly authorized officer this 1 day of February, 2012. VERASTEM, INC. By:/s/ Robert ForresterName:Robert ForresterTitle:Chief Operating Officer 10stExhibit 10.17 VERASTEM, INC. RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (the “Agreement”) is made as of August 11, 2010, by and between Verastem,Inc., a Delaware corporation (the “Company”), and Christoph Westphal (“Purchaser”). WHEREAS, the Company desires to issue, and Purchaser desires to acquire, stock of the Company as herein described, on the terms andconditions hereinafter set forth; NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. PURCHASE AND SALE OF STOCK. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell toPurchaser, an aggregate of 2,200,000 shares of the Common Stock of the Company (the “Stock”) at $0.0001 per share (the “Purchase Price”), for anaggregate purchase price of $220.00, payable in cash. The closing hereunder, including payment for and delivery of the Stock, shall occur at the offices of theCompany immediately following the execution of this Agreement, or at such other time and place as the parties may mutually agree. 2. REPURCHASE OPTION (a) In the event Purchaser’s relationship with the Company (or a parent or subsidiary of the Company) terminates for any reason (includingdeath or disability), or for no reason, such that after such termination Purchaser is no longer providing services to the Company (or a parent or subsidiary ofthe Company) as an employee, director, consultant or advisor (a “Service Provider”), then the Company shall have an irrevocable option (the “RepurchaseOption”), for a period of ninety (90) days after said termination to repurchase from Purchaser or Purchaser’s personal representative, as the case may be, at aprice per share equal to the Purchase Price, up to but not exceeding the number of shares of Stock that have not vested in accordance with the provisions ofSection 2(b) below as of such termination date. The term of the Repurchase Option shall be extended to such longer period (1) as may be agreed to by theCompany and the Purchaser; or (2) as needed to ensure the stock issued by the Company does not lose its status as “qualified small business stock” underSection 1202 of the Code (as defined below). Purchaser hereby acknowledges that the Company has no obligation, either now or in the future, torepurchase any of the shares of Common Stock, whether vested or unvested, at any time. (b) One Million Six Hundred and Fifty Thousand (1,650,000) shares of the Stock (the “Option Shares”) shall initially be unvested andsubject to the Repurchase Option. One-sixteenth (1/16) of the Option Shares shall vest and be released from the Repurchase Option on a quarterly basismeasured from the Commencement Date (as set forth on the signature page of this Agreement), until all the Stock is released from the Repurchase Option(provided in each case that Purchaser remains a Service Provider as of the date of such release). (c) In the event of a Change in Control, the Repurchase Option shall lapse and all shares of Stock subject to Repurchase Option shallimmediately become fully vested. For purposes hereof, “Change in Control” shall mean (A) a sale or other disposition of all or substantially all (asdetermined by the Board of Directors in its sole discretion) of the assets of the Company; or (B) a merger, consolidation or similar transaction in which theCompany is not the surviving corporation (other than a transaction in which stockholders immediately before the transaction have, immediately after thetransaction, at least a majority of the voting power of the surviving corporation); or (C) the consummation of a merger, consolidation or similar transaction inwhich the Company is the surviving corporation but the shares of the Company’s Common Stock outstanding immediately preceding the transaction areconverted by virtue of the transaction into other property, whether in the form of securities, cash or otherwise (other than a transaction in which stockholdersimmediately before the transaction have, immediately after the transaction, at least a majority of the voting power of the surviving corporation); or (D) anytransaction or series of related transactions in which in excess of fifty percent (50%) of the Company’s voting power is transferred, other than the sale by theCompany of stock in transactions the primary purpose of which is to raise capital for the Company’s operations and activities. 3. EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by written notice signed by an officer of the Company orby any assignee or assignees of the Company and delivered or mailed as provided in Section 16(a). Such notice shall identify the number of shares of Stockto be purchased and shall notify Purchaser of the time, place and date for settlement of such purchase, which shall be scheduled by the Company within theterm of the Repurchase Option set forth in Section 2 above. The Company shall be entitled to pay for any shares of Stock purchased pursuant to itsRepurchase Option at the Company’s option in cash or by offset against any indebtedness owing to the Company by Purchaser, or by a combination of both.Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial ownerof the Stock being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the Stockbeing repurchased by the Company, without further action by Purchaser. 4. ADJUSTMENTS TO STOCK. If, from time to time, during the term of the Repurchase Option there is any change affecting the Company’soutstanding Common Stock as a class that is effected without the receipt of consideration by the Company (through merger, consolidation, reorganization,reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, change in corporationstructure or other transaction not involving the receipt of consideration by the Company), then any and all new, substituted or additional securities or otherproperty to which Purchaser is entitled by reason of Purchaser’s ownership of Stock shall be immediately subject to the Repurchase Option and be included inthe word “Stock” for all purposes of the Repurchase Option with the same force and effect as the shares of the Stock presently subject to the RepurchaseOption, but only to the extent the Stock is, at the time, covered by such Repurchase Option. While the total Purchase Price shall remain the same after eachsuch event, the Purchase Price per share of Stock upon exercise of the Repurchase Option shall be appropriately adjusted. th2 5. CORPORATE TRANSACTION. In the event of (a) an Acquisition (as defined below); or (b) an Asset Transfer (as defined below) ((a) and (b)being collectively referred to herein as a “Corporate Transaction”), then the Repurchase Option shall be assigned by the Company to any successor of theCompany (or the successor’s parent) in connection with such Corporate Transaction. To the extent that the Repurchase Option remains in effect following sucha Corporate Transaction, it shall apply to the new capital stock or other property received in exchange for the Stock in consummation of the CorporateTransaction, but only to the extent the Stock is at the time covered by such right. Appropriate adjustments shall be made to the Purchase Price per sharepayable upon exercise of the Repurchase Option to reflect the effect of the Corporate Transaction upon the Company’s capital structure; provided, however,that the aggregate Purchase Price shall remain the same. For the purposes of this Section 5: (i) “Acquisition” shall mean (A) any consolidation or merger of the Company with or into any other corporationor other entity or person, or any other corporate reorganization; or (B) any transaction or series of related transactions to which the Company is a party inwhich in excess of fifty percent (50%) of the Company’s voting power is transferred; and (ii) “Asset Transfer” shall mean a sale, lease, exclusive license orother disposition of all or substantially all of the assets of the Company. 6. TERMINATION OF REPURCHASE OPTION. Sections 2, 3, 4 and 5 of this Agreement shall terminate upon the exercise in full or expirationof the Repurchase Option, whichever occurs first. 7. ESCROW OF UNVESTED STOCK. As security for Purchaser’s faithful performance of the terms of this Agreement and to insure theavailability for delivery of Purchaser’s Stock upon exercise of the Repurchase Option herein provided for, Purchaser agrees, at the closing hereunder, to deliverto and deposit with the Secretary of the Company or the Secretary’s designee (“Escrow Agent”), as Escrow Agent in this transaction, three (3) stockassignments duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit A, together with a certificate or certificatesevidencing all of the Stock subject to the Repurchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuantto the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit B attached hereto and incorporated by this reference, which instructionsshall also be delivered to the Escrow Agent at the closing hereunder. Purchaser hereby acknowledges that the Secretary of the Company, or the Secretary’sdesignee, is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment iscoupled with an interest and is accordingly irrevocable. Purchaser agrees that Escrow Agent shall not be liable to any party hereof (or to any other party).Escrow Agent may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Purchaseragrees that if the Secretary of the Company, or the Secretary’s designee, resigns as Escrow Agent for any or no reason, the Board of Directors of the Companyshall have the power to appoint a successor to serve as Escrow Agent pursuant to the terms of this Agreement. Purchaser agrees that if the Secretary of theCompany resigns as Secretary, the successor Secretary shall serve as Escrow Agent pursuant to the terms of this Agreement. 8. RIGHTS OF PURCHASER. Subject to the provisions of Sections 7, 9, 12 and 14 herein, Purchaser shall exercise all rights and privileges of ashareholder of the Company with respect to 3 the Stock deposited in escrow. Purchaser shall be deemed to be the holder for purposes of receiving any dividends that may be paid with respect to such sharesof Stock and for the purpose of exercising any voting rights relating to such shares of Stock, even if some or all of such shares of Stock have not yet vestedand been released from the Repurchase Option. 9. LIMITATIONS ON TRANSFER. (a) In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, hypothecate, donate,encumber, dispose of or otherwise transfer or dispose of any interest in the Stock while the Stock is unvested and is subject to the Repurchase Option. (b) After any Stock has become vested and has been released from the Repurchase Option, Purchaser shall not assign, hypothecate, donate,encumber, dispose of or otherwise transfer any interest in the Stock except in compliance with the following restrictions and applicable securities laws: (i) Before assigning, hypothecating, donating, encumbering, disposing of or otherwise transferring any interest in the Stock, thePurchaser shall give written notice of such intention to the Company which notice shall include the name of the proposed transferee, the proposed purchaseprice per share or other interest, the terms of payment of such purchase price and all other matters relating to such transfer and shall be accompanied by acopy of the binding written agreement of the proposed transferee to purchase the shares of or other interest in the Stock of the Purchaser. Such notice shallconstitute a binding offer by the Purchaser to sell to the Company such number of the shares of Stock or other interest in the Stock then held by the Purchaseras are proposed to be sold in the notice at the monetary price per share designated in such notice, payable on the terms offered to the Purchaser by the proposedtransferee (provided, however, that the Company shall not be required to meet any non-monetary terms of the proposed transfer, including, without limitation,delivery of other securities in exchange for the Shares proposed to be sold). The Company shall give written notice to the Purchaser as to whether such offerhas been accepted in whole by the Company within 60 days after its receipt of written notice from the Purchaser. The Company may only accept such offer inwhole and may not accept such offer in part. Such acceptance notice shall specify a place, a time, and date for the closing on such purchase (for purposes ofthis Section 9, the “Closing” and the date on which the Closing occurs, the “Closing Date”) which shall not be less than ten nor more than 60 days after thegiving of the acceptance notice, provided, however, if any of the Shares to be sold pursuant to this Section 9 have been held by the Purchaser for less than sixmonths, then the Closing Date may be extended by the Company until no more than ten days after such Shares have been held by the Purchaser for sixmonths if required under applicable accounting rules in effect at the time. At the Closing, the Purchaser shall accept payment as set forth herein and shalldeliver to the Company in exchange therefor the Shares being repurchased, duly endorsed for transfer, to the extent that they are not then in the possession ofthe Company. (ii) If the Company shall fail to accept any such offer, the Purchaser shall be free to sell all, but not less than all, of the shares orother interests set forth in his notice to the designated transferee at the price and terms designated in the Purchaser’s notice, provided, that (i) such sale isconsummated within six months after the giving of notice by the Purchaser to the 4 Company as aforesaid, and (ii) the transferee first agrees in writing to be bound by the provisions of this Section so that he or she (and all subsequenttransferees) shall thereafter only be permitted to sell or transfer the Shares in accordance with the terms hereof. After the expiration of such six months, theprovisions of this Section shall again apply with respect to any proposed voluntary transfer of the Shares. (iii) The Company may assign in whole or in part any of its rights provided in this Section 9 to purchase shares of Stock or anyinterests therein of the Purchaser to such other stockholders of the Company as the Company determines, in which event the rights granted to the Company inthis Section 9 shall apply, mutatis mutandis, to all such stockholders to whom such rights have been assigned. (c) The provisions of this Section 9 may be waived by the Company. Any such waiver may be unconditional or based upon such conditionsas the Company may impose. (d) Notwithstanding the restrictions on transfer contained in this Section 9 such restrictions shall not apply to (a) transfers by the Purchaserto his or her spouse or children or to a trust for the benefit of his or her spouse or children, (b) transfers by the Purchaser to his or her guardian or conservator,and (c) transfers by the Purchaser, in the event of his or her death, to his or her executor(s) or administrator(s) or to trustee(s) under his or her will(collectively, “Permitted Transferees”); provided, however, that in any such event the shares of Stock or interests therein so transferred in the hands ofeach such Permitted Transferee shall remain subject to this Agreement, and each such Permitted Transferee shall so acknowledge in writing as a conditionprecedent to the effectiveness of such transfer. 10. RESTRICTIVE LEGENDS. All certificates representing the Stock shall have endorsed thereon legends in substantially the following forms (inaddition to any other legend which may be required by other agreements between the parties hereto): (a) “THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A WRITTEN AGREEMENT BETWEEN THECOMPANY AND THE REGISTERED HOLDER, OR SUCH HOLDER’S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THEPRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY SHARES SUBJECT TO SUCH AGREEMENTIS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF THE COMPANY.” (b) “THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF1933 AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANEFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TOTHE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.” (c) Any legend required by appropriate blue sky officials. 11. INVESTMENT REPRESENTATIONS. In connection with the purchase of the Stock, Purchaser represents to the Company the following: 5 (a) Purchaser is aware of the Company’s business affairs and financial condition and has acquired sufficient information about theCompany to reach an informed and knowledgeable decision to acquire the Stock. Purchaser is purchasing the Stock for investment for Purchaser’s ownaccount only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended(the “Act”). (b) Purchaser understands that the Stock has not been registered under the Act by reason of a specific exemption therefrom, which exemptiondepends upon, among other things, the bona fide nature of Purchaser’s investment intent as expressed herein. (c) Purchaser further acknowledges and understands that the Stock must be held indefinitely unless the Stock is subsequentlyregistered under the Act or an exemption from such registration is available. Purchaser further acknowledges and understands that the Company isunder no obligation to register the Stock. Purchaser understands that the certificate evidencing the Stock will be imprinted with a legend which prohibits thetransfer of the Stock unless the Stock is registered or such registration is not required in the opinion of counsel for the Company. (d) Purchaser is familiar with the provisions of Rule 144, under the Act, as in effect from time to time, which, in substance, permit limitedpublic resale of “restricted securities” acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offeringsubject to the satisfaction of certain conditions. The Stock may be resold by Purchaser in certain limited circumstances subject to the provisions of Rule 144,which may require, among other things, (i) the availability of certain public information about the Company and (ii) the resale occurring following the requiredholding period under Rule 144 after the Purchaser has purchased, and made full payment for (within the meaning of Rule 144), the securities to be sold. (e) Purchaser further understands that at the time Purchaser wishes to sell the Stock there may be no public market upon which to make sucha sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, andthat, in such event, Purchaser may be precluded from selling the Stock under Rule 144 even if the minimum holding period requirement had been satisfied. (f) Purchaser represents that Purchaser is an “accredited investor” as that term is defined in Rule 501 of Regulation D promulgated by theSecurities and Exchange Commission under the Securities Act of 1933, as amended. 12. MARKET STAND-OFF AGREEMENT. Purchaser shall not sell, dispose of, transfer, make any short sale of, grant any option for thepurchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Common Stock or other securities of the Companyheld by Purchaser (other than those included in the registration), including the Stock (the “Restricted Securities”), during the 180-day period following theeffective date of the Company’s first firm commitment underwritten public offering of its Common Stock (or such longer period, not to exceed 34 days afterthe expiration of the 180-day period, as the underwriters or the Company shall request in order to facilitate compliance with NASD Rule 2711 or NYSEMember Rule 472 or any successor or similar rule or regulation) (the “Lock Up 6 Period”), provided, however, that nothing contained in this Section 12 shall prevent the exercise of the Repurchase Option during the Lock Up Period.Purchaser agrees to execute and deliver such other agreements as may be reasonably requested by the Company and/or the managing underwriters which areconsistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to Purchaser’s Restricted Securities until the end of such period. The underwriters of the Company’s stock are intended thirdparty beneficiaries of this Section 12 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. 13. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the “Code”), taxesas ordinary income the difference between the amount paid for the Stock and the fair market value of the Stock as of the date any restrictions on the Stocklapse. In this context, “restriction” includes the right of the Company to buy back the Stock pursuant to the Repurchase Option set forth in Section 2 above.Purchaser understands that Purchaser may elect to be taxed at the time the Stock is purchased, rather than when and as the Repurchase Option expires, byfiling an election under Section 83(b) (an “83(b) Election”) of the Code with the Internal Revenue Service within thirty (30) days from the date of purchase.Even if the fair market value of the Stock at the time of the execution of this Agreement equals the amount paid for the Stock, the 83(b) Election must be madeto avoid income under Section 83(a) in the future. Purchaser understands that failure to file such an 83(b) Election in a timely manner may result in adversetax consequences for Purchaser. Purchaser further understands that an additional copy of such 83(b) Election is required to be filed with his or her federalincome tax return for the calendar year in which the date of this Agreement falls. Purchaser further acknowledges and understands that it isPurchaser’s sole obligation and responsibility to timely file such 83(b) Election, and neither the Company nor the Company’s legal or financialadvisors shall have any obligation or responsibility with respect to such filing. Purchaser acknowledges that the foregoing is only a summary of theeffect of United States federal income taxation with respect to purchase of the Stock hereunder, and does not purport to be complete. Purchaser furtheracknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of anymunicipality, state or foreign country in which Purchaser may reside, and the tax consequences of Purchaser’s death. Purchaser assumes all responsibility forfiling an 83(b) Election and paying all taxes resulting from such election or the lapse of the restrictions on the Stock. 14. REFUSAL TO TRANSFER. The Company shall not be required (a) to transfer on its books any shares of Stock of the Company which shallhave been transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote assuch owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 15. NO EMPLOYMENT RIGHTS. This Agreement is not an employment or other service contract and nothing in this Agreement shall affect in anymanner whatsoever the right or power of the Company (or a parent or subsidiary of the Company) to terminate Purchaser’s employment or other servicerelationship for any reason at any time, with or without cause and with or without notice. 7 16. MISCELLANEOUS. (a) Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery tothe party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, and if not during normal businesshours of the recipient, then on the next business day, (iii) five (5) calendar days after having been sent by registered or certified mail, return receipt requested,postage prepaid, or (iv) one (1) business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verificationof receipt. All communications shall be sent to the other party hereto at such party’s address hereinafter set forth on the signature page hereof, or at such otheraddress as such party may designate by ten (10) days advance written notice to the other party hereto. (b) Successors and Assigns. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to therestrictions on transfer herein set forth, be binding upon Purchaser, Purchaser’s successors, and assigns. The Repurchase Option of the Company hereundershall be assignable by the Company at any time or from time to time, in whole or in part. (c) Attorneys’ Fees; Specific Performance. Purchaser shall reimburse the Company for all costs incurred by the Company in enforcing theperformance of, or protecting its rights under, any part of this Agreement, including reasonable costs of investigation and attorneys’ fees. It is the intention ofthe parties that the Company, upon exercise of the Repurchase Option and payment therefor, pursuant to the terms of this Agreement, shall be entitled to receivethe Stock, in specie, in order to have such Stock available for future issuance without dilution of the holdings of other shareholders. Furthermore, it isexpressly agreed between the parties that money damages are inadequate to compensate the Company for the Stock and that the Company shall, upon properexercise of the Repurchase Option, be entitled to specific enforcement of its rights to purchase and receive said Stock. (d) Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth ofMassachusetts. The parties agree that any action brought by either party to interpret or enforce any provision of this Agreement shall be brought in, and eachparty agrees to, and does hereby, submit to the jurisdiction and venue of, the appropriate state or federal court for the district encompassing the Company’sprincipal place of business. (e) Further Execution. The parties agree to take all such further action (s) as may reasonably be necessary to carry out and consummate thisAgreement as soon as practicable, and to take whatever steps may be necessary to obtain any governmental approval in connection with or otherwise qualifythe issuance of the securities that are the subject of this Agreement. (f) Independent Counsel. Purchaser acknowledges that this Agreement has been prepared on behalf of the Company by Cooley LLP, counselto the Company and that Cooley LLP does not represent, and is not acting on behalf of, Purchaser. Purchaser has been provided with an opportunity toconsult with Purchaser’s own counsel with respect to this Agreement. 8 (g) Entire Agreement; Amendment. This Agreement constitutes the entire agreement between the parties with respect to the subject matterhereof and supersedes and merges all prior agreements or understandings, whether written or oral. This Agreement may not be amended, modified or revoked,in whole or in part, except by an agreement in writing signed by each of the parties hereto. (h) Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiatesuch provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) suchprovision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) thebalance of the Agreement shall be enforceable in accordance with its terms. (i) Release. As a condition of receiving the benefits under Section 2(c) of this Agreement to which Purchaser would not otherwise be entitled,Purchaser shall execute the Company’s standard form of a release of claims (the “Release”) and permit such Release to become effective in accordance with itsterms. Unless the Release is executed by Purchaser and delivered to the Company within the period of time set forth in the Release, and such Release becomeseffective, Purchaser shall not receive any of the accelerated vesting benefits provided for under this Agreement. (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of whichtogether shall constitute one instrument. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. VERASTEM, INC. By:/s/ Paul Brannelly Title:Secretary and Treasurer Address:800 Boylston Street, Suite 1555Boston, MA 02199 PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 2 HEREOF IS EARNEDONLY BY CONTINUING SERVICE AS AN EMPLOYEE, DIRECTOR, CONSULTANT OR ADVISOR AT THE WILL OF THE COMPANY.PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPONPURCHASER ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH EMPLOYMENT, DIRECTORSHIP, CONSULTING ORADVISORY RELATIONSHIP WITH THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH PURCHASER’S RIGHT ORTHE COMPANY’S RIGHT TO TERMINATE PURCHASER’S EMPLOYMENT, DIRECTORSHIP, CONSULTING OR ADVISORYRELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. PURCHASER ACKNOWLEDGES AND AGREES THAT PURCHASER MUST HOLD THE COMMON STOCK PURCHASEDHEREUNDER INDEFINITELY, AND THAT THE COMPANY HAS NO OBLIGATION TO REPURCHASE SUCH SHARES. PURCHASERFURTHER ACKNOWLEDGES THAT ANY RISK RELATED TO THE FLUCTUATION IN THE VALUE OF THE STOCK FROM ANDAFTER THE DATE HEREOF, INCLUDING ANY LOSSES TO PURCHASER AS A RESULT OF THE COMPANY’S EXERCISE OF ITSREPURCHASE OPTION PURSUANT TO SECTION 2, SHALL BE BORNE BY PURCHASER. PURCHASER ACKNOWLEDGES THAT PURCHASER HAS READ ALL TAX RELATED SECTIONS AND FURTHERACKNOWLEDGES PURCHASER HAS HAD AN OPPORTUNITY TO CONSULT PURCHASER’S OWN TAX, LEGAL AND FINANCIALADVISORS REGARDING THE PURCHASE OF COMMON STOCK UNDER THIS AGREEMENT. PURCHASER ACKNOWLEDGES AND AGREES THAT IN MAKING THE DECISION TO PURCHASE THE COMMON STOCKHEREUNDER PURCHASER HAS NOT RELIED ON ANY STATEMENT, WHETHER WRITTEN OR ORAL, REGARDING THESUBJECT MATTER HEREOF, EXCEPT AS EXPRESSLY PROVIDED HEREIN AND IN THE ATTACHMENTS AND EXHIBITSHERETO. PURCHASER: /s/ Christoph WestphalChristoph Westphal Address:17 Hawes St.Brookline, MA 02446 VESTING COMMENCEMENT DATE: August 10, 2010 10Exhibit 10.18 VERASTEM, INC. RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (the “Agreement”) is made as of August 11, 2010, by and betweenVerastem, Inc., a Delaware corporation (the “Company”), and Rich Aldrich (“Purchaser”). WHEREAS, the Company desires to issue, and Purchaser desires to acquire, stock of the Company as herein described, on the terms andconditions hereinafter set forth; NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. PURCHASE AND SALE OF STOCK. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell toPurchaser, an aggregate of 1,900,000 shares of the Common Stock of the Company (the “Stock”) at $0.0001 per share (the “Purchase Price”), for anaggregate purchase price of $190.00, payable in cash. The closing hereunder, including payment for and delivery of the Stock, shall occur at the offices of theCompany immediately following the execution of this Agreement, or at such other time and place as the parties may mutually agree. 2. REPURCHASE OPTION (a) In the event Purchaser’s relationship with the Company (or a parent or subsidiary of the Company) terminates for any reason (includingdeath or disability), or for no reason, such that after such termination Purchaser is no longer providing services to the Company (or a parent or subsidiary ofthe Company) as an employee, director, consultant or advisor (a “Service Provider”), then the Company shall have an irrevocable option (the “RepurchaseOption”), for a period of ninety (90) days after said termination to repurchase from Purchaser or Purchaser’s personal representative, as the case may be, at aprice per share equal to the Purchase Price, up to but not exceeding the number of shares of Stock that have not vested in accordance with the provisions ofSection 2(b) below as of such termination date. The term of the Repurchase Option shall be extended to such longer period (1) as may be agreed to by theCompany and the Purchaser, or (2) as needed to ensure the stock issued by the Company does not lose its status as “qualified small business stock” underSection 1202 of the Code (as defined below). Purchaser hereby acknowledges that the Company has no obligation, either now or in the future, torepurchase any of the shares of Common Stock, whether vested or unvested, at any time. (b) One Million Four Hundred and Twenty-Five Thousand (1,425,000) shares of the Stock (the “Option Shares”) shall initially be unvestedand subject to the Repurchase Option. One-sixteenth (1/16) of the Option Shares shall vest and be released from the Repurchase Option on a quarterly basismeasured from the Vesting Commencement Date (as set forth on the signature page of this Agreement), until all the Stock is released from the RepurchaseOption (provided in each case that Purchaser remains a Service Provider as of the date of such release). 1 (c) In the event of a Change in Control, the Repurchase Option shall lapse and all shares of Stock subject to Repurchase Option shallimmediately become fully vested. For purposes hereof, “Change in Control” shall mean (A) a sale or other disposition of all or substantially all (asdetermined by the Board of Directors in its sole discretion) of the assets of the Company; or (B) a merger, consolidation or similar transaction in which theCompany is not the surviving corporation (other than a transaction in which stockholders immediately before the transaction have, immediately after thetransaction, at least a majority of the voting power of the surviving corporation); or (C) the consummation of a merger, consolidation or similar transaction inwhich the Company is the surviving corporation but the shares of the Company’s Common Stock outstanding immediately preceding the transaction areconverted by virtue of the transaction into other property, whether in the form of securities, cash or otherwise (other than a transaction in which stockholdersimmediately before the transaction have, immediately after the transaction, at least a majority of the voting power of the surviving corporation); or (D) anytransaction or series of related transactions in which in excess of fifty percent (50%) of the Company’s voting power is transferred, other than the sale by theCompany of stock in transactions the primary purpose of which is to raise capital for the Company’s operations and activities. 3. EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by written notice signed by an officer of the Company orby any assignee or assignees of the Company and delivered or mailed as provided in Section 16(a). Such notice shall identify the number of shares of Stockto be purchased and shall notify Purchaser of the time, place and date for settlement of such purchase, which shall be scheduled by the Company within theterm of the Repurchase Option set forth in Section 2 above. The Company shall be entitled to pay for any shares of Stock purchased pursuant to itsRepurchase Option at the Company’s option in cash or by offset against any indebtedness owing to the Company by Purchaser, or by a combination of both.Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial ownerof the Stock being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the Stockbeing repurchased by the Company, without further action by Purchaser. 4. ADJUSTMENTS TO STOCK. If, from time to time, during the term of the Repurchase Option there is any change affecting the Company’soutstanding Common Stock as a class that is effected without the receipt of consideration by the Company (through merger, consolidation, reorganization,reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, change in corporationstructure or other transaction not involving the receipt of consideration by the Company), then any and all new, substituted or additional securities or otherproperty to which Purchaser is entitled by reason of Purchaser’s ownership of Stock shall be immediately subject to the Repurchase Option and be included inthe word “Stock” for all purposes of the Repurchase Option with the same force and effect as the shares of the Stock presently subject to the RepurchaseOption, but only to the extent the Stock is, at the time, covered by such Repurchase Option. While the total Purchase Price shall remain the same after eachsuch event, the Purchase Price per share of Stock upon exercise of the Repurchase Option shall be appropriately adjusted.th 2 5. CORPORATE TRANSACTION. In the event of (a) an Acquisition (as defined below); or (b) an Asset Transfer (as defined below) ((a) and(b) being collectively referred to herein as a “Corporate Transaction”), then the Repurchase Option shall be assigned by the Company to any successor ofthe Company (or the successor’s parent) in connection with such Corporate Transaction. To the extent that the Repurchase Option remains in effect followingsuch a Corporate Transaction, it shall apply to the new capital stock or other property received in exchange for the Stock in consummation of the CorporateTransaction, but only to the extent the Stock is at the time covered by such right. Appropriate adjustments shall be made to the Purchase Price per sharepayable upon exercise of the Repurchase Option to reflect the effect of the Corporate Transaction upon the Company’s capital structure; provided, however,that the aggregate Purchase Price shall remain the same. For the purposes of this Section 5: (i) “Acquisition” shall mean (A) any consolidation or merger of the Company with or into any other corporationor other entity or person, or any other corporate reorganization; or (B) any transaction or series of related transactions to which the Company is a party inwhich in excess of fifty percent (50%) of the Company’s voting power is transferred; and (ii) “Asset Transfer” shall mean a sale, lease, exclusive license orother disposition of all or substantially all of the assets of the Company. 6. TERMINATION OF REPURCHASE OPTION. Sections 2, 3, 4 and 5 of this Agreement shall terminate upon the exercise in full or expirationof the Repurchase Option, whichever occurs first. 7. ESCROW OF UNVESTED STOCK. As security for Purchaser’s faithful performance of the terms of this Agreement and to insure theavailability for delivery of Purchaser’s Stock upon exercise of the Repurchase Option herein provided for, Purchaser agrees, at the closing hereunder, to deliverto and deposit with the Secretary of the Company or the Secretary’s designee (“Escrow Agent”), as Escrow Agent in this transaction, three (3) stockassignments duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit A, together with a certificate or certificatesevidencing all of the Stock subject to the Repurchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuantto the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit B attached hereto and incorporated by this reference, which instructionsshall also be delivered to the Escrow Agent at the closing hereunder. Purchaser hereby acknowledges that the Secretary of the Company, or the Secretary’sdesignee, is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment iscoupled with an interest and is accordingly irrevocable. Purchaser agrees that Escrow Agent shall not be liable to any party hereof (or to any other party).Escrow Agent may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Purchaseragrees that if the Secretary of the Company, or the Secretary’s designee, resigns as Escrow Agent for any or no reason, the Board of Directors of the Companyshall have the power to appoint a successor to serve as Escrow Agent pursuant to the terms of this Agreement. Purchaser agrees that if the Secretary of theCompany resigns as Secretary, the successor Secretary shall serve as Escrow Agent pursuant to the terms of this Agreement. 8. RIGHTS OF PURCHASER. Subject to the provisions of Sections 7, 9, 12 and 14 herein, Purchaser shall exercise all rights and privileges of ashareholder of the Company with respect to 3 the Stock deposited in escrow. Purchaser shall be deemed to be the holder for purposes of receiving any dividends that may be paid with respect to such sharesof Stock and for the purpose of exercising any voting rights relating to such shares of Stock, even if some or all of such shares of Stock have not yet vestedand been released from the Repurchase Option. 9. LIMITATIONS ON TRANSFER. (a) In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, hypothecate, donate,encumber, dispose of or otherwise transfer or dispose of any interest in the Stock while the Stock is unvested and is subject to the Repurchase Option. (b) After any Stock has become vested and has been released from the Repurchase Option, Purchaser shall not assign, hypothecate, donate,encumber, dispose of or otherwise transfer any interest in the Stock except in compliance with the following restrictions and applicable securities laws: (i) Before assigning, hypothecating, donating, encumbering, disposing of or otherwise transferring any interest in the Stock, thePurchaser shall give written notice of such intention to the Company which notice shall include the name of the proposed transferee, the proposed purchaseprice per share or other interest, the terms of payment of such purchase price and all other matters relating to such transfer and shall be accompanied by acopy of the binding written agreement of the proposed transferee to purchase the shares of or other interest in the Stock of the Purchaser. Such notice shallconstitute a binding offer by the Purchaser to sell to the Company such number of the shares of Stock or other interest in the Stock then held by the Purchaseras are proposed to be sold in the notice at the monetary price per share designated in such notice, payable on the terms offered to the Purchaser by the proposedtransferee (provided, however, that the Company shall not be required to meet any non-monetary terms of the proposed transfer, including, without limitation,delivery of other securities in exchange for the Shares proposed to be sold). The Company shall give written notice to the Purchaser as to whether such offerhas been accepted in whole by the Company within 60 days after its receipt of written notice from the Purchaser. The Company may only accept such offer inwhole and may not accept such offer in part. Such acceptance notice shall specify a place, a time, and date for the closing on such purchase (for purposes ofthis Section 9, the “Closing” and the date on which the Closing occurs, the “Closing Date”) which shall not be less than ten nor more than 60 days after thegiving of the acceptance notice, provided, however, if any of the Shares to be sold pursuant to this Section 9 have been held by the Purchaser for less than sixmonths, then the Closing Date may be extended by the Company until no more than ten days after such Shares have been held by the Purchaser for sixmonths if required under applicable accounting rules in effect at the time. At the Closing, the Purchaser shall accept payment as set forth herein and shalldeliver to the Company in exchange therefor the Shares being repurchased, duly endorsed for transfer, to the extent that they are not then in the possession ofthe Company. (ii) If the Company shall fail to accept any such offer, the Purchaser shall be free to sell all, but not less than all, of the shares orother interests set forth in his notice to the designated transferee at the price and terms designated in the Purchaser’s notice, provided, that (i) such sale isconsummated within six months after the giving of notice by the Purchaser to the 4 Company as aforesaid, and (ii) the transferee first agrees in writing to be bound by the provisions of this Section so that he or she (and all subsequenttransferees) shall thereafter only be permitted to sell or transfer the Shares in accordance with the terms hereof. After the expiration of such six months, theprovisions of this Section shall again apply with respect to any proposed voluntary transfer of the Shares. (iii) The Company may assign in whole or in part any of its rights provided in this Section 9 to purchase shares of Stock or anyinterests therein of the Purchaser to such other stockholders of the Company as the Company determines, in which event the rights granted to the Company inthis Section 9 shall apply, mutatis mutandis, to all such stockholders to whom such rights have been assigned. (c) The provisions of this Section 9 may be waived by the Company. Any such waiver may be unconditional or based upon such conditionsas the Company may impose. (d) Notwithstanding the restrictions on transfer contained in this Section 9 such restrictions shall not apply to (a) transfers by the Purchaserto his or her spouse or children or to a trust for the benefit of his or her spouse or children, (b) transfers by the Purchaser to his or her guardian or conservator,and (c) transfers by the Purchaser, in the event of his or her death, to his or her executor(s) or administrator(s) or to trustee(s) under his or her will(collectively, “Permitted Transferees”); provided, however, that in any such event the shares of Stock or interests therein so transferred in the hands ofeach such Permitted Transferee shall remain subject to this Agreement, and each such Permitted Transferee shall so acknowledge in writing as a conditionprecedent to the effectiveness of such transfer. 10. RESTRICTIVE LEGENDS. All certificates representing the Stock shall have endorsed thereon legends in substantially the following forms (inaddition to any other legend which may be required by other agreements between the parties hereto): (a) “THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A WRITTEN AGREEMENT BETWEEN THECOMPANY AND THE REGISTERED HOLDER, OR SUCH HOLDER’S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THEPRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY SHARES SUBJECT TO SUCH AGREEMENTIS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF THE COMPANY.” (b) “THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF1933 AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANEFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TOTHE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.” (c) Any legend required by appropriate blue sky officials. 11. INVESTMENT REPRESENTATIONS. In connection with the purchase of the Stock, Purchaser represents to the Company the following: 5 (a) Purchaser is aware of the Company’s business affairs and financial condition and has acquired sufficient information about theCompany to reach an informed and knowledgeable decision to acquire the Stock. Purchaser is purchasing the Stock for investment for Purchaser’s ownaccount only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act of 1933, as amended(the “Act”). (b) Purchaser understands that the Stock has not been registered under the Act by reason of a specific exemption therefrom, which exemptiondepends upon, among other things, the bona fide nature of Purchaser’s investment intent as expressed herein. (c) Purchaser further acknowledges and understands that the Stock must be held indefinitely unless the Stock is subsequentlyregistered under the Act or an exemption from such registration is available. Purchaser further acknowledges and understands that the Company isunder no obligation to register the Stock. Purchaser understands that the certificate evidencing the Stock will be imprinted with a legend which prohibits thetransfer of the Stock unless the Stock is registered or such registration is not required in the opinion of counsel for the Company. (d) Purchaser is familiar with the provisions of Rule 144, under the Act, as in effect from time to time, which, in substance, permit limitedpublic resale of “restricted securities” acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offeringsubject to the satisfaction of certain conditions. The Stock may be resold by Purchaser in certain limited circumstances subject to the provisions of Rule 144,which may require, among other things, (i) the availability of certain public information about the Company and (ii) the resale occurring following the requiredholding period under Rule 144 after the Purchaser has purchased, and made full payment for (within the meaning of Rule 144), the securities to be sold. (e) Purchaser further understands that at the time Purchaser wishes to sell the Stock there may be no public market upon which to make sucha sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, andthat, in such event, Purchaser may be precluded from selling the Stock under Rule 144 even if the minimum holding period requirement had been satisfied. (f) Purchaser represents that Purchaser is an “accredited investor” as that term is defined in Rule 501 of Regulation D promulgated by theSecurities and Exchange Commission under the Securities Act of 1933, as amended. 12. MARKET STAND-OFF AGREEMENT. Purchaser shall not sell, dispose of, transfer, make any short sale of, grant any option for thepurchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Common Stock or other securities of the Companyheld by Purchaser (other than those included in the registration), including the Stock (the “Restricted Securities”), during the 180-day period following theeffective date of the Company’s first firm commitment underwritten public offering of its Common Stock (or such longer period, not to exceed 34 days afterthe expiration of the 180-day period, as the underwriters or the Company shall request in order to facilitate compliance with NASD Rule 2711 or NYSEMember Rule 472 or any successor or similar rule or regulation) (the “Lock Up 6 Period”), provided, however, that nothing contained in this Section 12 shall prevent the exercise of the Repurchase Option during the Lock Up Period.Purchaser agrees to execute and deliver such other agreements as may be reasonably requested by the Company and/or the managing underwriters which areconsistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to Purchaser’s Restricted Securities until the end of such period. The underwriters of the Company’s stock are intended thirdparty beneficiaries of this Section 12 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. 13. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the “Code”), taxesas ordinary income the difference between the amount paid for the Stock and the fair market value of the Stock as of the date any restrictions on the Stocklapse. In this context, “restriction” includes the right of the Company to buy back the Stock pursuant to the Repurchase Option set forth in Section 2 above.Purchaser understands that Purchaser may elect to be taxed at the time the Stock is purchased, rather than when and as the Repurchase Option expires, byfiling an election under Section 83(b) (an “83(b) Election”) of the Code with the Internal Revenue Service within thirty (30) days from the date of purchase.Even if the fair market value of the Stock at the time of the execution of this Agreement equals the amount paid for the Stock, the 83(b) Election must be madeto avoid income under Section 83(a) in the future. Purchaser understands that failure to file such an 83(b) Election in a timely manner may result in adversetax consequences for Purchaser. Purchaser further understands that an additional copy of such 83(b) Election is required to be filed with his or her federalincome tax return for the calendar year in which the date of this Agreement falls. Purchaser further acknowledges and understands that it isPurchaser’s sole obligation and responsibility to timely file such 83(b) Election, and neither the Company nor the Company’s legal or financialadvisors shall have any obligation or responsibility with respect to such filing. Purchaser acknowledges that the foregoing is only a summary of theeffect of United States federal income taxation with respect to purchase of the Stock hereunder, and does not purport to be complete. Purchaser furtheracknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of anymunicipality, state or foreign country in which Purchaser may reside, and the tax consequences of Purchaser’s death. Purchaser assumes all responsibility forfiling an 83(b) Election and paying all taxes resulting from such election or the lapse of the restrictions on the Stock. 14. REFUSAL TO TRANSFER. The Company shall not be required (a) to transfer on its books any shares of Stock of the Company which shallhave been transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote assuch owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 15. NO EMPLOYMENT RIGHTS. This Agreement is not an employment or other service contract and nothing in this Agreement shall affect in anymanner whatsoever the right or power of the Company (or a parent or subsidiary of the Company) to terminate Purchaser’s employment or other servicerelationship for any reason at any time, with or without cause and with or without notice. 7 16. MISCELLANEOUS. (a) Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery tothe party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, and if not during normal businesshours of the recipient, then on the next business day, (iii) five (5) calendar days after having been sent by registered or certified mail, return receipt requested,postage prepaid, or (iv) one (1) business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verificationof receipt. All communications shall be sent to the other party hereto at such party’s address hereinafter set forth on the signature page hereof, or at such otheraddress as such party may designate by ten (10) days advance written notice to the other party hereto. (b) Successors and Assigns. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to therestrictions on transfer herein set forth, be binding upon Purchaser, Purchaser’s successors, and assigns. The Repurchase Option of the Company hereundershall be assignable by the Company at any time or from time to time, in whole or in part. (c) Attorneys’ Fees; Specific Performance. Purchaser shall reimburse the Company for all costs incurred by the Company in enforcing theperformance of, or protecting its rights under, any part of this Agreement, including reasonable costs of investigation and attorneys’ fees. It is the intention ofthe parties that the Company, upon exercise of the Repurchase Option and payment therefor, pursuant to the terms of this Agreement, shall be entitled to receivethe Stock, in specie, in order to have such Stock available for future issuance without dilution of the holdings of other shareholders. Furthermore, it isexpressly agreed between the parties that money damages are inadequate to compensate the Company for the Stock and that the Company shall, upon properexercise of the Repurchase Option, be entitled to specific enforcement of its rights to purchase and receive said Stock. (d) Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth ofMassachusetts. The parties agree that any action brought by either party to interpret or enforce any provision of this Agreement shall be brought in, and eachparty agrees to, and does hereby, submit to the jurisdiction and venue of, the appropriate state or federal court for the district encompassing the Company’sprincipal place of business. (e) Further Execution. The parties agree to take all such further action (s) as may reasonably be necessary to carry out and consummate thisAgreement as soon as practicable, and to take whatever steps may be necessary to obtain any governmental approval in connection with or otherwise qualifythe issuance of the securities that are the subject of this Agreement. (f) Independent Counsel. Purchaser acknowledges that this Agreement has been prepared on behalf of the Company by Cooley LLP, counselto the Company and that Cooley LLP does not represent, and is not acting on behalf of, Purchaser. Purchaser has been provided with an opportunity toconsult with Purchaser’s own counsel with respect to this Agreement. 8 (g) Entire Agreement; Amendment. This Agreement constitutes the entire agreement between the parties with respect to the subject matterhereof and supersedes and merges all prior agreements or understandings, whether written or oral. This Agreement may not be amended, modified or revoked,in whole or in part, except by an agreement in writing signed by each of the parties hereto. (h) Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiatesuch provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) suchprovision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) thebalance of the Agreement shall be enforceable in accordance with its terms. (i) Release. As a condition of receiving the benefits under Section 2(c) of this Agreement to which Purchaser would not otherwise be entitled,Purchaser shall execute the Company’s standard form of a release of claims (the “Release”) and permit such Release to become effective in accordance with itsterms. Unless the Release is executed by Purchaser and delivered to the Company within the period of time set forth in the Release, and such Release becomeseffective, Purchaser shall not receive any of the accelerated vesting benefits provided for under this Agreement. (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of whichtogether shall constitute one instrument. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. VERASTEM, INC. By:/s/ Paul Brannelly Title:Secretary and Treasurer Address:800 Boylston Street, Suite 1555Boston, MA 02199 PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 2 HEREOF IS EARNEDONLY BY CONTINUING SERVICE AS AN EMPLOYEE, DIRECTOR, CONSULTANT OR ADVISOR AT THE WILL OF THE COMPANY.PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPONPURCHASER ANY RIGHT WITH RESPECT TO CONTINUATION OF SUCH EMPLOYMENT, DIRECTORSHIP, CONSULTING ORADVISORY RELATIONSHIP WITH THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH PURCHASER’S RIGHT ORTHE COMPANY’S RIGHT TO TERMINATE PURCHASER’S EMPLOYMENT, DIRECTORSHIP, CONSULTING OR ADVISORYRELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. PURCHASER ACKNOWLEDGES AND AGREES THAT PURCHASER MUST HOLD THE COMMON STOCK PURCHASEDHEREUNDER INDEFINITELY, AND THAT THE COMPANY HAS NO OBLIGATION TO REPURCHASE SUCH SHARES. PURCHASERFURTHER ACKNOWLEDGES THAT ANY RISK RELATED TO THE FLUCTUATION IN THE VALUE OF THE STOCK FROM ANDAFTER THE DATE HEREOF, INCLUDING ANY LOSSES TO PURCHASER AS A RESULT OF THE COMPANY’S EXERCISE OF ITSREPURCHASE OPTION PURSUANT TO SECTION 2, SHALL BE BORNE BY PURCHASER. PURCHASER ACKNOWLEDGES THAT PURCHASER HAS READ ALL TAX RELATED SECTIONS AND FURTHERACKNOWLEDGES PURCHASER HAS HAD AN OPPORTUNITY TO CONSULT PURCHASER’S OWN TAX, LEGAL AND FINANCIALADVISORS REGARDING THE PURCHASE OF COMMON STOCK UNDER THIS AGREEMENT. PURCHASER ACKNOWLEDGES AND AGREES THAT IN MAKING THE DECISION TO PURCHASE THE COMMON STOCKHEREUNDER PURCHASER HAS NOT RELIED ON ANY STATEMENT, WHETHER WRITTEN OR ORAL, REGARDING THESUBJECT MATTER HEREOF, EXCEPT AS EXPRESSLY PROVIDED HEREIN AND IN THE ATTACHMENTS AND EXHIBITSHERETO. PURCHASER: /s/ Rich AldrichRich Aldrich Address:26 Beech Rd.Brookline, MA 02446 VESTING COMMENCEMENT DATE: August 10, 2010 10Exhibit 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the “Agreement”) dated March 28, 2012 is by and between Verastem, Inc. (the “Company”), a Delawarecorporation with its principal place of business at 215 First Street, Suite 440, Cambridge, MA 02142, and Paul Brannelly (the “Employee”) of 40 GlenellenRoad, Boston, MA 02132. WHEREAS, the Employee is possessed of certain experience and expertise that qualify him to provide management direction and leadership for theCompany. WHEREAS, the Company wishes to employ the Employee to serve as its Vice President, Finance. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receiptand sufficiency of which are hereby acknowledged, the Company offers and the Employee accepts employment upon the following terms and conditions: 1. Position and Duties. Upon the terms and subject to the conditions set forth in this Agreement, the Company hereby offers and theEmployee hereby accepts employment with the Company to serve as its Vice President, Finance. The Employee agrees to perform the duties of the Employee’sposition and such other duties as reasonably may be assigned to the Employee from time to time. The Employee also agrees that while employed by theCompany, the Employee will devote one hundred percent (100%) of the Employee’s business time and the Employee’s reasonable commercial efforts, businessjudgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and to the discharge of the Employee’s duties andresponsibilities for it. 2. Compensation and Benefits. During the Employee’s employment, as compensation for all services performed by the Employee for theCompany and subject to his performance of his duties and responsibilities for the Company, pursuant to this Agreement or otherwise, the Company willprovide the Employee the following pay and benefits: (a) Base Salary; Annual Bonus. Effective January 1, 2012, the Company will pay the Employee a base salary at the rate of TwoHundred and Fifty Eight Thousand Dollars ($258,000) per year. Such amounts shall be payable in accordance with the regular payroll practices of theCompany, as in effect from time to time, and subject to increase from time to time by the Board in its discretion. The Employee shall have the opportunity toearn an annual target bonus measured against performance criteria to be determined by the Board (or a committee thereof) of 30% of the Employee’s thencurrent annual base salary. Any bonus amount payable by the Company, if any, shall be paid no later than March 15 of the year following the year in whichsuch bonus is earned. (b) Stock Options; RSUs. Upon commencement of employment the Employee was granted a stock option to purchase TwoHundred Ten Thousand (210,000) shares of the Company’s Common Stock (representing 60,000 shares after giving effect to a 1-for-3.5 reverse stock split ofthe Company’s Common Stock effected on January 10, 2012 (the “Reverse Stock Split”)) at a price per share of $0.08 (representing a price per share of $0.28after giving effect to the Reverse Stock Split). The stock option will vest over four years at the rate of 25% on the one year anniversary of the Employee’s date of hiresubject to his continuing employment with the Company, and no shares shall vest before such date, except as provided below. The remaining shares shallvest quarterly over the next three years in equal quarterly amounts subject to the Employee’s continuing employment with the Company, except as providedbelow. Upon the closing of the initial public offering of the Company’s Common Stock on February 1, 2012 (the “2012 IPO”), the Company granted to theEmployee a restricted stock unit award (the “IPO RSU”) representing the right to receive 28,571 shares of Company Common Stock (after giving effect to theReverse Stock Split and subject to appropriate adjustment to reflect any stock dividend, stock split, combination or other similar recapitalization with respectto the Company’s Common Stock) upon satisfaction of applicable vesting conditions, as set forth in the Restricted Stock Unit Agreement between theCompany and the Employee. (c) Participation in Employee Benefit Flans. The Employee will be entitled to participate in all Employee Benefit Plans from timeto time in effect for employees of the Company generally, except to the extent such plans are duplicative of benefits otherwise provided the Employee under thisAgreement (e.g., severance pay) or under any other agreement. The Employee’s participation will be subject to the terms of the applicable plan documents andgenerally applicable Company policies. The Company may alter, modify, add to or delete its Employee Benefit Plans at any time as it, in its sole judgment,determines to be appropriate, without recourse by the Employee. For purposes of this Agreement, “Employee Benefit Plan” shall have the meaning ascribed tosuch term in Section 3(3) of ERISA, as amended from time to time. (d) Vacation. The Employee will accrue three weeks paid vacation per year (or such greater amount as is generally made available tothe Company’s employees) in accordance with the Company’s policies from time to time in effect and receive paid holidays in accordance with the Companyholiday schedule. Vacation may be taken at such times and intervals as the Employee shall determine, subject to the business needs of the Company, andotherwise shall be subject to the policies of the Company, as in effect from time to time. (e) Business Expenses. The Company will pay or reimburse the Employee for all reasonable business expenses incurred or paidby the Employee in the performance of his duties and responsibilities for the Company, subject to any maximum annual limit and other restrictions on suchexpenses set by the Company and to such reasonable substantiation and documentation as it may specify from time to time. Any such reimbursement thatwould constitute nonqualified deferred compensation subject to Section 409A shall be subject to the following additional rules: (i) no reimbursement of anysuch expense shall affect the Employee’s right to reimbursement of any other such expense in any other taxable year; (ii) reimbursement of the expense shall bemade, if at all, not later than the end of the calendar year following the calendar year in which the expense was incurred; and (iii) the right to reimbursementshall not be subject to liquidation or exchange for any other benefit. 3. Confidential Information, Non-Competition and Proprietary Information. The Employee has executed or will execute theCompany’s standard Employee Non-Solicitation, Non-Competition, Confidential Information and Inventions Assignment Agreement. It is understood andagreed that breach by the Employee of the Employee Non-Solicitation, Non- 2 Competition, Confidential Information and Inventions Assignment Agreement shall constitute a material breach of this Agreement. 4. Termination of Employment. The Employee’s employment under this Agreement shall continue until terminated pursuant to thisSection 4. (a) The Company may terminate the Employee’s employment for “Cause” upon written notice to the Employee setting forth inreasonable detail the nature of the Cause. The following, as determined by the Board in good faith and using its reasonable judgment, shall constitute Causefor termination: (i) the Employee’s willful failure to perform, or gross negligence in the performance of, the Employee’s material duties and responsibilities tothe Company and its Affiliates which is not remedied within thirty (30) days of written notice thereof; (ii) material breach by the Employee of any materialprovision of this Agreement or any other agreement with the Company or any of its Affiliates which is not remedied within thirty (30) days of written noticethereof; (iii) fraud, embezzlement or other dishonesty with respect to the Company and any of its Affiliates, taken as a whole, which, in the case of such otherdishonesty, causes or could reasonably be expected to cause material harm to the Company and any of its Affiliates, taken as a whole; or (iv) the Employee’sconviction of a felony. (b) The Company may terminate the Employee’s employment at any time other than for Cause upon one month’s written notice to theEmployee. (c) The Employee may terminate his employment hereunder for Good Reason by providing notice to the Company of the conditiongiving rise to the Good Reason no later than thirty (30) days following the occurrence of the condition, by giving the Company thirty (30) days to remedy thecondition and by terminating employment for Good Reason within thirty (30) days thereafter if the Company fails to remedy the condition. For purposes ofthis Agreement, “Good Reason” shall mean, without the Employee’s consent, the occurrence of anyone or more of the following events: (i) material diminutionin the nature or scope of the Employee’s responsibilities, duties or authority, provided that in the absence of a Change of Control any diminution in the natureor scope of the Employee’s responsibilities, duties or authority that is reasonably related to a diminution of the business of the Company or any of its Affiliatesshall constitute “Good Reason”; (ii) a material reduction in the Employee’s base salary other than one temporary reduction of not more than 120 days and notin excess of 20% of the Employee’s base salary in connection with and in proportion to a general reduction of the base salaries of the Company’s employees;(iii) failure of the Company to provide the Employee the salary or benefits in accordance with Section 2 hereof after thirty (30) days’ notice during which theCompany does not cure such failure; or (iv) relocation of the Employee’s office more than forty (40) miles from the location of the Company’s principal officesas of the date of Employee’s hire. (d) The Employee may terminate his employment with the Company other than for Good Reason at any time upon one month’snotice to the Company. (e) This Agreement shall automatically terminate in the event of the Employee’s death during employment. The Company mayterminate the Employee’s employment, upon notice to the Employee, in the event the Employee becomes disabled during 3 employment and, as a result, is unable to continue to perform substantially all of his material duties and responsibilities under this Agreement for one-hundredand fifty (150) days during any period of three hundred and sixty-five (365) consecutive calendar days. If any question shall arise as to whether theEmployee is disabled to the extent that the Employee is unable to perform substantially all of his material duties and responsibilities for the Company and itsAffiliates, the Employee shall, at the Company’s request and expense, submit to a medical examination by a physician selected by the Company to whom theEmployee or the Employee’s guardian, if any, has no reasonable objection to determine whether the Employee is so disabled and such determination shall forthe purposes of this Agreement be conclusive of the issue. If such a question arises and the Employee fails to submit to the requested medical examination, theCompany’s determination of the issue shall be binding on the Employee. 5. Severance Payments and Other Matters Related to Termination. (a) Termination pursuant to Section 4(b) or 4(c). i. Except as provided in Section 5(c) below, in the event of termination of the Employee’s employment either by theCompany other than for Cause pursuant to Section 4(a) of this Agreement or by the Employee for Good Reason pursuant to Section 4(c) of this Agreement, (I)all unvested options, restricted stock and restricted stock units (including the IPO RSUs) in each case that were granted prior to the 2012 IPO, and which bytheir terms, vest only based on the passage of time (disregarding any acceleration of the vesting of such options, restricted stock or restricted stock units basedon individual or Company performance) shall vest as of the date of termination (notwithstanding anything to the contrary in Section 2(b) of this Agreement)with respect to an additional six (6) months of vesting; and (II) the Company shall pay the Employee’s then-current annual base salary for a period of six (6)months in accordance with the Company’s payroll practice then in effect, beginning on the Payment Commencement Date. ii. If the Employee is participating in the Company’s group health plan and/or dental plan at the time the Employee’semployment terminates, and the Employee exercises his right to continue participation in those plans under the federal law known as COBRA, or anysuccessor law, the Company will pay or, at its option, reimburse the Employee, for the full premium cost of that participation for six (6) months following thedate on which the Employee’s employment with the Company terminates, or, if earlier, until the date the Employee becomes eligible to enroll in the health (or, ifapplicable, dental) plan of a new employer, payable in accordance with regular payroll practices for benefits beginning on the Payment Commencement Date. The Company will also pay the Employee on the date of termination any base salary earned but not paid through the, date of termination and pay for anyvacation time accrued but not used to that date. In addition, the Company will pay the Employee any bonus which has been awarded to the Employee, but notyet paid on the date of termination of his employment, payable in a lump sum on the payment Commencement Date. iii. Any obligation of the Company to provide the Employee severance payments or other benefits under this Section 5(a) isconditioned on the Employee’s signing an effective and reasonable release of claims in the form provided by the Company (the “Employee Release”) within 60days following the termination of the Employee’s employment, 4 which release shall not apply to (i) rights to receive insurance payments under any policy maintained by the Company and (ii) rights to receive retirementbenefits that are accrued and fully vested at the time of the Employee’s termination and rights under such plans protected by ERISA. The severance paymentsshall be paid or commence on the first payroll period following the date the Employee Release becomes effective, but shall be retroactive to the date oftermination (the “Payment Commencement Date”). Notwithstanding the foregoing, if the 60 day following the date of termination occurs in the calendar yearfollowing the calendar year of the termination, then the Payment Commencement Date shall be no earlier than January 1 of such subsequent calendar year. The Employee agrees to provide the Company prompt notice of the Employee’s eligibility to participate in the health plan and, if applicable, dental plan of anyemployer. The Employee further agrees to repay any overpayment of health benefit premiums made by the Company hereunder. (b) Termination other than pursuant to Section 4(b) or 4(c). In the event of any termination of the Employee’s employment, otherthan a termination by the Company pursuant to Section 4(b) of this Agreement or a termination by the Employee for Good Reason pursuant to Section 4(c) ofthis Agreement, the Company will pay the Employee any base salary earned but not paid through the date of termination and pay for any vacation timeaccrued but not used to that date. In addition, the Company will pay the Employee any bonus which has been awarded to the Employee, but not yet paid onthe date of termination of the Employee’s employment. The Company shall have no other obligation to the Employee under this Agreement. (c) Upon a Change of Control. i. If, within ninety (90) days prior to the Change of Control or within eighteen (18) months following a Change of Control(as defined in Section 6 hereof), the Company or any successor thereto terminates the Employee’s employment other than for Cause, or the Employeeterminates his employment for Good Reason, then, in lieu of any payments to the Employee or on the Employee’s behalf under Section 5(a) hereof, (i) allunvested options, restricted stock and restricted stock units which, by their terms, vest only based on the passage of time (disregarding any acceleration of thevesting of such options, restricted stock or restricted stock units based on individual or Company performance) shall vest as of the date of termination(notwithstanding anything to the contrary in Section 2(b) of this Agreement) with respect to 100% of the unvested portion of such awards; and (ii) theCompany shall pay, within thirty (30) days of such termination, a lump sum payment equal to the Employee’s then-current annual base salary for a period ofsix (6) months; provided, however, that if such termination occurs prior to a Change of Control, such severance payments shall be made at the time and inthe manner set forth in Section 5(a)(i) during the period beginning on the date of termination through the date of the Change of Control with any severanceremaining to be paid under this Section 5(c)(i) payable in a lump sum on the closing date of the Change of Control; and, ii. If the Employee is participating in the Company’s group health plan and/or dental plan at the time the Employee’semployment terminates (whether such termination is as described in (i) above), and the Employee exercises his right to continue participation in those plansunder the federal law known as COBRA, or any successor law, the Company will pay or, at its option, reimburse the Employee, for the full premium cost ofthat 5 participation for six (6) months following the date on which the Employee’s employment with the Company terminates or, if earlier, until the date theEmployee becomes eligible to enroll in the health (or, if applicable, dental) plan of a new employer, with such amount payable on a pro-rata basis inaccordance with the Company’s regular payroll practices for benefits. The Company will also pay the Employee on the date of termination any base salaryearned but not paid through the, date of termination and pay for any vacation time accrued but not used to that date. In addition, the Company will pay theEmployee any bonus which has been awarded to the Employee, but not yet paid on the date of termination of his employment, payable within 30 days of thedate of termination. (d) Except for any right the Employee may have under applicable law to continue participation in the Company’s group health anddental plans under COBRA, or any successor law, benefits shall terminate in accordance with the terms of the applicable benefit plans based on the date oftermination of the Employee’s employment, without regard to any continuation of base salary or other payment to the Employee following termination. (e) Provisions of this Agreement shall survive any termination if so provided in this Agreement or if necessary or desirable toaccomplish the purposes of other surviving provisions, including without limitation the Employee’s obligations under Section 3 of this Agreement and underththe Employee Non-Solicitation, Non-Competition, Confidential Information and Inventions Assignment Agreement. The obligation of the Company to makepayments to the Employee or on the Employee’s behalf under Section 5 of this Agreement is expressly conditioned upon the Employee’s continued fullperformance of the Employee’s obligations under Section 3 hereof, under the Employee Non-Solicitation, Non-Competition, Confidential Information andInventions Assignment Agreement to be executed herewith, and under any subsequent agreement between the Employee and the Company or any of itsAffiliates relating to confidentiality, non-competition, proprietary information or the like. 6. Definitions. For purposes of this agreement; the following definitions apply: “Affiliates” means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where controlmay be by management authority, equity interest or otherwise. “Change of Control” shall mean (i) the acquisition of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly byany “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), of securities of the Company representing a majority or more of thecombined voting power of the Company’s then outstanding securities, other than an acquisition of securities for investment purposes pursuant to a bona fidefinancing of the Company; (ii) a merger or consolidation of the Company with any other corporation in which the holders of the voting securities of theCompany prior to the merger or consolidation do not own more than 50% of the total voting securities of the surviving corporation; or (iii) the sale ordisposition by the Company of all or substantially all of the Company’s assets other than a sale or disposition of assets to an Affiliate of the Company or aholder of securities of the Company; notwithstanding the foregoing, no transaction or series of transactions shall constitute a Change of Control unless suchtransaction or series of transactions constitutes a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5)(i). 6 “Person” means an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization, other than theCompany or any of its Affiliates. 7. Conflicting Agreements. The Employee hereby represents and warrants that his signing of this Agreement and the performance of hisobligations under it will not breach or be in conflict with any other agreement to which the Employee is a party or is bound and that the Employee is not nowsubject to any covenants against competition or similar covenants or any court order that could affect the performance of the Employee’s obligations under thisAgreement. The Employee agrees that he will not disclose to or use on behalf of the Company any proprietary information of a third party without that party’sconsent. 8. Withholding; Other Tax Matters. Anything to the contrary notwithstanding, (a) all payments required to be made by the Companyhereunder to Employee shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company mayreasonably determine it should withhold pursuant to any applicable law or regulation, and (b) all severance payments and benefits payable pursuant toSections 5(a) and 5(c) hereof shall be subject to the terms and conditions set forth on Exhibit A attached hereto. 9. Assignment. Neither the Employee nor the Company may make any assignment of this Agreement or any interest in it, by operation oflaw or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under thisAgreement without the Employee’s consent to one of its Affiliates or to any Person with whom the Company shall hereafter affect a reorganization, consolidatewith, or merge into or to whom it transfers all or substantially all of its properties or assets. This Agreement shall inure to the benefit of and be binding uponthe Employee and the Company, and each of our respective successors, executors, administrators, heirs and permitted assigns. 10. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competentjurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is sodeclared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullestextent permitted by law. 11. Miscellaneous. This Agreement, together with the Employee Non-Solicitation, Non-Competition, Confidential Information andInventions Assignment Agreement, sets forth the entire agreement between the Employee and the Company and replaces all prior communications, agreementsand understandings, written or oral, with respect to the terms and conditions of the Employee’s employment. This Agreement may not be modified oramended, and no breach shall be deemed to be waived, unless agreed to in writing by the Employee and an expressly authorized representative of the Board. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of thisAgreement. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one andthe same instrument. This is a Massachusetts contract and shall be governed and construed in accordance with the laws of the Commonwealth ofMassachusetts, without regard to the conflict-of-laws principles thereof. 7 12. Notices. Any notices provided for in this Agreement shall be in writing and shall be effective when delivered in person, consigned to areputable national courier service for overnight delivery or deposited in the United States mail, postage prepaid, and addressed to the Employee at theEmployee’s last known address on the books of the Company or, in the case of the Company, to it by notice to the Chairman of the Board of Directors, c/oVerastem, Inc. at its principal place of business, or to such other addressees) as either party may specify by notice to the other actually received. [Remainder of page intentionally left blank.] 8 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and bythe Employee, as of the date first stated above. THE EXECUTIVETHE COMPANY /s/ Paul Brannelly/s/ Robert ForresterPaul BrannellyRobert ForresterChief Operating Officer 9 Exhibit A Payments Subject to Section 409A 1. Subject to this Exhibit A, any severance payments that may be due under the Agreement shall begin only upon the date of the Employee’s“separation from service” (determined as set forth below) which occurs on or after the termination of Employee’s employment. The following rules shall applywith respect to distribution of the severance payments, if any, to be provided to Employee under the Agreement, as applicable: (a) It is intended that each installment of the severance payments under the Agreement provided under shall be treated as a separate “payment”for purposes of Section 409A. Neither the Company nor Employee shall have the right to accelerate or defer the delivery of any such payments exceptto the extent specifically permitted or required by Section 409A. (b) If, as of the date of Employee’s “separation from service” from the Company, Employee is not a “specified employee” (within the meaningof Section 409A), then each installment of the severance payments shall be made on the dates and terms set forth in the Agreement. (c) If, as of the date of Employee’s “separation from service” from the Company, Employee is a “specified employee” (within the meaning ofSection 409A), then: (i) Each installment of the severance payments due under the Agreement that, in accordance with the dates and terms set forthherein, will in all circumstances, regardless of when Employee’s separation from service occurs, be paid within the short-term deferralperiod (as defined under Section 409A) shall be treated as a short-term deferral within the meaning of Treasury Regulation Section 1.409A-1(b)(4) to the maximum extent permissible under Section 409A and shall be paid on the dates and terms set forth in the Agreement; and (ii) Each installment of the severance payments due under the Agreement that is not described in this Exhibit A, Section 1(c)(i) andthat would, absent this subsection, be paid within the six-month period following Employee’s “separation from service” from the Companyshall not be paid until the date that is six months and one day after such separation from service (or, if earlier, Employee’s death), with anysuch installments that are required to be delayed being accumulated during the six-month period and paid in a lump sum on the date that issix months and one day following Employee’s separation from service and any subsequent installments, if any, being paid in accordancewith the dates and terms set forth herein; provided, however, that the preceding provisions of this sentence shall not apply to anyinstallment of payments if and to the maximum extent that that such installment is deemed to be paid under a separation pay plan that doesnot provide for a deferral of compensation by reason of the application of Treasury Regulation 1.409A-1(b)(9)(iii) (relating to separation payupon an involuntary 10 separation from service). Any installments that qualify for the exception under Treasury Regulation Section 1.409A-1(b)(9)(iii) must bepaid no later than the last day of Employee’s second taxable year following the taxable year in which the separation from service occurs. 2. The determination of whether and when Employee’s separation from service from the Company has occurred shall be made and in a mannerconsistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-1(h). Solely for purposes of this Exhibit A, Section 2,“Company” shall include all persons with whom the Company would be considered a single employer under Section 414(b) and 414(c) of the Code. 3. The Company makes no representation or warranty and shall have no liability to Employee or to any other person if any of the provisions of theAgreement (including this Exhibit) are determined to constitute deferred compensation subject to Section 409A but that do not satisfy an exemption from, or theconditions of, that section. 11Exhibit 31.1 CERTIFICATIONS I, Christoph Westphal, M.D., Ph.D. certify that: 1. I have reviewed this Annual Report on Form 10-K of Verastem, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. /s/ Christoph WestphalChristoph Westphal, M.D., Ph.D.President and Chief Executive Officer Date: March 30, 2012 Exhibit 31.2 CERTIFICATIONS I, Robert Forrester, certify that: 1. I have reviewed this Annual Report on Form 10-K of Verastem, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. /s/ Robert ForresterRobert ForresterChief Operating Officer Date: March 30, 2012 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Verastem, Inc. (the “Company”) for the period ended December 31, 2011 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, Christoph Westphal, M.D., Ph.D., President and Chief ExecutiveOfficer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that to his knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Christoph WestphalChristoph Westphal, M.D., Ph.D.President and Chief Executive Officer Date: March 30, 2012 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Verastem, Inc. (the “Company”) for the period ended December 31, 2011 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, Robert Forrester, Chief Operating Officer of the Company, herebycertifies, pursuant to 18 U.S.C. Section 1350, that to his knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ Robert ForresterRobert ForresterChief Operating Officer Date: March 30, 2012 

Continue reading text version or see original annual report in PDF format above