Verrica Pharmaceuticals Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. Verrica is a clinical-stage dermatology therapeutics company with no approved products and no product revenue.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $0 | $0; no product sales to date |
| Research and development expense | $4.9 million | $4.5 million |
| General and administrative expense | $5.0 million | $3.5 million |
| Total operating expenses | $9.9 million | $8.0 million |
| Net loss | $9.8 million; $0.39 per share | $7.5 million; $0.30 per share |
| Operating cash used | $7.9 million | $6.9 million |
| Cash, cash equivalents and marketable securities | $88.4 million | $62.0 million at December 31, 2019 |
| Long-term debt, net | $34.4 million | None at December 31, 2019 |
There is no meaningful product gross margin because the company had no revenue. Cash and cash equivalents were $54.5 million at quarter-end; marketable securities were $33.9 million. Cash increased $45.2 million in the quarter, principally reflecting $34.5 million of net debt proceeds and portfolio maturities/sales. Accumulated deficit was $71.0 million. Management expects existing cash and securities to fund planned operations at least through Q2 2021.
Material changes and financing
- Net loss increased by $2.3 million year over year. R&D expense rose $0.4 million, mainly from compensation and VP-102 external-genital-wart development, partly offset by lower molluscum trial costs. G&A rose $1.4 million, reflecting headcount, insurance, professional fees, operating costs and pre-commercial activity.
- On March 10, 2020, Verrica borrowed $35.0 million under a mezzanine term loan; net debt on the balance sheet was $34.4 million after discounts and issuance costs. An additional $15.0 million term loan is available only after specified revenue and equity-raise milestones. A separate revolving facility of up to $5.0 million was available, subject to eligible receivables; no draw is reported.
- The term loan matures March 1, 2024, bears floating interest at a minimum 7.25%, and includes a 7.5% final payment fee. Principal is interest-only through March 2022, then amortizes, subject to different terms if the additional loan is drawn. Debt is secured by substantially all assets other than intellectual property, subject to specified exceptions.
- The company reported compliance with loan covenants at March 31. However, revenue covenants and subjective acceleration provisions may create risk if commercialization is delayed; management said acceleration was reasonably possible but not probable at quarter-end.
Business outlook, risks and unusual items
- VP-102 is under FDA review for molluscum; the NDA was accepted, with a PDUFA goal date of July 13, 2020. Management planned U.S. self-commercialization if approved, including commercialization preparation for YCANTH.
- COVID-19 led Verrica to delay the planned Phase 3 common-warts trials for VP-102 and Phase 2 plantar-warts trial for VP-103 until conditions are appropriate. Management said Q1 financial results were not significantly affected, but the pandemic could disrupt trials, enrollment, suppliers, launch preparation and regulatory review.
- The Phase 2 VP-102 external-genital-warts trial continued; topline results were expected in the second half of 2020. Timing and costs of development remain uncertain, and further capital may be needed if spending increases, milestones slip or commercialization is delayed.
- A March lease amendment expanded planned headquarters space to 11,201 square feet. The seven-year lease is expected to commence in Q3 2020, potentially delayed by COVID-related construction restrictions; base rent over the initial term is approximately $2.4 million, plus operating expenses.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31 because of an IT general-controls material weakness involving segregation of duties and related controls. Administrative access was transferred to a third-party IT vendor in April; remediation was not yet considered complete.
- No legal proceedings were reported. The filing states the company expects continued significant operating losses and may never become profitable.
Important facts for investors to verify
- FDA’s action and timing on the VP-102 molluscum NDA relative to the July 13, 2020 goal date.
- COVID-19 effects on the delayed trials, ongoing external-genital-warts study, supply chain and commercialization timeline.
- Cash burn and whether the stated runway through Q2 2021 remains adequate under development and launch plans.
- Loan covenant compliance, milestone conditions for the additional $15.0 million, and potential acceleration or repayment obligations.
- Progress and testing of remediation for the material weakness in internal controls.