Verrica Pharmaceuticals Inc. quarterly report, Q3 FY2019

Business context and reporting period

Verrica Pharmaceuticals Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The clinical-stage dermatology company had no approved products and no product revenue. Its lead candidate, VP-102, is a cantharidin drug-device combination being developed for molluscum contagiosum, common warts and external genital warts.

Financial results and liquidity

Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.

• Margins are not meaningful because the company reported no revenue. There was no material debt reported.
• At September 30, cash and cash equivalents were $10.6 million and marketable securities were $60.5 million, totaling $71.1 million, versus $89.8 million at December 31, 2018. Current assets were $74.0 million; current liabilities were $4.3 million. Stockholders’ equity was $71.7 million.
• For the first nine months, operating activities used $19.2 million of cash, investing activities provided $19.3 million (primarily reflecting security sales and maturities net of purchases), and financing activities provided $0.2 million. Cash increased $0.3 million to $10.6 million.

Material changes versus prior comparable periods

• Q3 net loss increased $0.2 million year over year. R&D expense decreased $0.4 million, mainly from lower molluscum development costs, partly offset by genital-wart development and manufacturing scale-up. G&A rose $0.6 million, reflecting headcount, insurance, professional and other costs, and pre-commercial activity.
• Nine-month net loss increased $7.5 million. R&D rose $3.6 million, principally due to manufacturing scale-up, NDA preparation, genital-wart development and staffing. G&A rose $4.8 million, primarily due to staffing and related compensation, insurance, professional fees and pre-commercial costs.
• Cash and marketable securities declined $18.7 million from year-end 2018. The 2018 comparative results reflect retrospective application of the company’s change to straight-line recognition of stock-based compensation for service-only awards.

Outlook, commentary, risks and unusual items

• Management expected existing cash, cash equivalents and marketable securities to fund operating expenses and capital requirements at least through the end of 2020. It expected significant operating losses and expenses to continue; profitability and future product revenue were uncertain.
• The company reported positive top-line results from Phase 3 CAMP-1 and CAMP-2 trials of VP-102 for molluscum and submitted an NDA to the FDA in September 2019. It reported positive Phase 2 COVE-1 results for common warts and planned pivotal Phase 3 trials in the first quarter of 2020. A Phase 2 external-genital-warts trial began in June 2019, with topline results expected in the second half of 2020; an IND for VP-103 in plantar warts was planned by year-end 2019.
• Key risks include clinical or regulatory setbacks, manufacturing scale-up, commercialization costs, and the possibility of needing additional financing. Further funding may dilute shareholders or require unfavorable debt, collaboration or licensing terms. Management noted that clinical timing, cost and outcomes are uncertain.
• A new seven-year headquarters lease signed July 1, 2019 has base rent of $1.3 million over its initial term, plus the company’s share of operating expenses. The company expected to move around mid-2020 and accelerate amortization of assets associated with its existing space. At September 30, lease liabilities were $0.218 million.
• PBM Capital Group, an affiliate associated with the company’s chairman and largest stockholder group, provided support services. Fees were reduced to $26,333 monthly effective January 2019 and to $5,000 effective October 1, 2019; Q3 2019 expense under the agreement was $79,000.
• The filing reported no legal proceedings and no material changes to the risk factors from the 2018 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.

Important facts for investors to verify

• Progress and FDA review of the September 2019 VP-102 molluscum NDA, including any review milestones or requests.
• Whether planned VP-102 common-wart Phase 3 trials and VP-103 plantar-wart IND activities occurred on the stated timetable, and the results of the genital-wart trial.
• Actual cash burn, updated liquidity runway and any financing needs relative to management’s end-of-2020 estimate.
• Manufacturing scale-up requirements, commercialization spending and the assumptions behind potential launch readiness.
• Terms, costs and transition timing for the new headquarters lease and the related-party PBM services agreement.