Business Overview and History
Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) is a dermatology therapeutics company that has been developing and commercializing medications for skin diseases requiring medical intervention. The company's journey has been marked by both successes and challenges, as it navigates the dynamic landscape of the dermatology industry.
Verrica Pharmaceuticals was founded on July 3, 2013, and is incorporated in the State of Delaware. The company's primary focus has been on the development and commercialization of its lead product candidate, YCANTH (VP-102), a proprietary drug-device combination that contains a GMP-controlled formulation of cantharidin. YCANTH was approved by the U.S. Food and Drug Administration (FDA) in July 2023 for the treatment of molluscum contagiosum in adult and pediatric patients aged two years and older, marking a significant milestone as the first FDA-approved product for this condition.
Prior to the FDA approval of YCANTH, Verrica had focused on developing the product candidate and organizing and staffing the company. The company has funded its operations primarily through the sale of equity and equity-linked securities and through borrowings under loan agreements. In July 2023, Verrica entered into a Credit Agreement with OrbiMed, pursuant to which the company borrowed $50 million. This provided additional capital to support the commercial launch of YCANTH and the company's ongoing operations, although the Credit Agreement included certain financial covenants that the company has had to navigate.
The commercial launch of YCANTH in August 2023 was a significant milestone for the company, as it sought to capitalize on the unmet medical need in the treatment of molluscum contagiosum. Throughout its history, Verrica has faced various challenges, including incurring substantial operating losses since inception and the need to continue securing additional capital to fund its operations and development activities. The company has also had to navigate the regulatory approval process for YCANTH and establish its commercial infrastructure to support the launch of the product.
However, Verrica has faced its fair share of obstacles. In June 2022, the company was hit with a putative class action lawsuit alleging that it failed to disclose certain manufacturing deficiencies at the facility where its contract manufacturer produced the bulk solution for YCANTH. The company has been actively defending itself against these claims, with the court granting in part and denying in part the defendants' motion to dismiss the amended complaint.
Financials and Operational Performance
Verrica's financial performance has shown signs of improvement with the launch of YCANTH. For the full year 2023, the company reported total revenue of $5.12 million, with product revenue, net of $2.79 million and collaboration revenue of $2.33 million. The company's net loss for the year was $66.99 million, or $1.48 per diluted share. Operating cash flow for 2023 was negative $38.58 million, and free cash flow was negative $38.94 million.
In the second quarter of 2024, Verrica reported total revenues of $5.2 million, which included YCANTH net revenues of $4.9 million. This represented a significant year-over-year increase of $2.28 million, primarily driven by growth in demand for YCANTH and the expansion of the distribution footprint with the addition of Cencora as a specialty distribution partner. However, this growth was partially offset by an increase in the returns reserve of $1.7 million. The company's gross product margins for the quarter were 93%, benefiting from certain components of standard cost of goods sold having been expensed as R&D prior to approval. The GAAP net loss for the quarter was $17.2 million, or $0.37 per share.
For the nine months ended September 30, 2024, Verrica reported product revenue, net of $6.26 million from sales of YCANTH VP-102.00 and collaboration revenue of $963,000 related to the Torii Agreement. Total operating expenses for this period were $61.73 million, including $48.94 million in selling, general and administrative expenses and $10.67 million in research and development expenses. The net loss for the nine-month period was $60.38 million.
It's worth noting that Verrica currently only sells YCANTH in the United States, which represents its sole geographic market at present.
Liquidity
As of December 31, 2023, Verrica's cash and cash equivalents stood at $69.55 million. The company's debt-to-equity ratio was -2.93, with a current ratio of 4.56 and a quick ratio of 4.49. These ratios suggest that Verrica has a relatively strong short-term liquidity position.
On July 26, 2023, Verrica entered into a $125 million credit facility with OrbiMed, of which $50 million was initially drawn. This additional financing has provided the company with more flexibility to fund its operations and commercial activities.
As of June 30, 2024, Verrica's cash and cash equivalents had decreased to $31.9 million. The company expects this amount to be sufficient to fund operations into the first quarter of 2025. Verrica has been actively managing its expenses, including a recent restructuring of its sales and operating teams to reduce costs and expand access to YCANTH.
Pipeline and Future Prospects
In addition to YCANTH for the treatment of molluscum contagiosum, Verrica has been developing the product candidate for potential follow-on indications, including common warts and external genital warts. The company has made progress in advancing its common warts program, amending its existing licensing agreement with Torii Pharmaceutical to jointly conduct and split the costs of a global pivotal Phase 3 trial for YCANTH in common warts.
The company's pipeline also includes VP-315, an oncolytic peptide-based injectable therapy for the potential treatment of dermatology oncologic conditions, including basal cell carcinoma (BCC). In August 2024, Verrica announced positive preliminary topline results from Part 2 of its Phase 2 study of VP-315 for the treatment of BCC, with approximately 51% of lesions achieving complete histologic clearance and an overall reduction in tumor size of approximately 86%.
Additionally, Verrica is developing VP-103, a second cantharidin-based drug-device combination, for the potential treatment of plantar warts. The company has conducted necessary drug development activities but has not yet initiated a Phase 2 clinical trial for this product candidate.
Market Opportunities and Industry Trends
The molluscum contagiosum market in the US is estimated to be around 22 million patients, representing a significant opportunity for Verrica's YCANTH product. This large patient population underscores the potential for continued growth in YCANTH sales as market penetration increases.
In the area of dermatology oncology, the basal cell carcinoma market in the US is estimated at 3.6 million diagnoses per year. This market is expected to grow to $11.5 billion by 2028, presenting a substantial opportunity for Verrica's VP-315 product candidate if it successfully completes clinical trials and gains regulatory approval.
Commercial Strategy and Distribution
To support the commercialization of YCANTH, Verrica has built a specialized sales organization of 35 sales representatives in the United States. This team is focused on pediatric dermatologists, dermatologists, and select pediatricians, which are key prescribers for molluscum contagiosum treatment.
The company has also expanded its distribution footprint, adding Cencora as a specialty distribution partner. This expansion has contributed to the growth in YCANTH revenues observed in recent quarters.
Verrica expects the inventory of compounded cantharidin products to continue to decrease in the second half of 2024, as these products typically have a 6-month shelf life. The company anticipates inventory levels to normalize in the channel in the latter part of 2024 and be fully normalized by early 2025.
Risks and Challenges
Verrica faces several risks and challenges as it navigates the dermatology therapeutics landscape. The company's reliance on the successful commercialization of YCANTH for the treatment of molluscum contagiosum creates significant concentration risk, as any setbacks in this product's adoption or sales could have a material impact on the company's financial performance.
The ongoing legal dispute regarding the manufacturing deficiencies at the facility where YCANTH's bulk solution was produced also poses a risk, as an unfavorable outcome could result in additional legal expenses and potential reputational damage.
Furthermore, Verrica's ability to secure additional financing to fund its operations and pipeline development remains a key concern, as the company's cash position is expected to be sufficient only into the first quarter of 2025. The company's dependence on third-party manufacturers and suppliers also introduces supply chain risks that could impact its ability to meet demand for YCANTH.
Conclusion
Verrica Pharmaceuticals has navigated a challenging path in the dermatology therapeutics space, marked by both successes and setbacks. The approval and commercial launch of YCANTH for the treatment of molluscum contagiosum was a significant milestone, but the company faces ongoing legal battles, financial constraints, and risks associated with its reliance on a single product.
As Verrica continues to explore ways to manage expenses, expand access to YCANTH, and advance its pipeline, investors will closely monitor the company's ability to overcome these obstacles and capitalize on the opportunities in the dermatology market. The company's future prospects will depend on its execution, its ability to secure additional financing, and its success in diversifying its product portfolio beyond YCANTH.
The growing demand for YCANTH and the expansion of Verrica's distribution network are positive signs for the company's near-term growth. However, the success of pipeline products like VP-315 for basal cell carcinoma and the potential expansion of YCANTH into additional indications will be crucial for Verrica's long-term success and diversification of revenue streams.