Verrica Pharmaceuticals Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 13, 2020. Verrica is a clinical-stage dermatology therapeutics company with no approved products and no product revenue.
Business context and development
The company’s lead candidate, VP-102, is a cantharidin topical drug-device combination. Its NDA for molluscum was accepted for FDA filing in November 2019, with a PDUFA goal date of July 13, 2020. The company was also developing VP-102 for common and external genital warts, and VP-103 for plantar warts.
- In Phase 3 molluscum trials CAMP-1 and CAMP-2, complete clearance at Day 84 was 46% and 54% with VP-102, versus 18% and 13% with placebo; both comparisons had p<0.0001. No treatment-related serious adverse events were reported.
- In the open-label Phase 2 COVE-1 common-wart trial, Day 84 complete clearance was 19.0% in Cohort 1 and 51.4% in Cohort 2. The company planned two Phase 3 trials in the first half of 2020.
- A Phase 2 trial for external genital warts began in June 2019; topline results were expected in the second half of 2020. The company planned to begin a VP-103 Phase 2 plantar-wart trial in mid-2020.
Financial results and liquidity
| Metric (USD millions, except per-share data) | 2019 | 2018 |
|---|---|---|
| Revenue | 0 | 0 |
| Research and development expense | 15.4 | 12.8 |
| General and administrative expense | 14.6 | 9.1 |
| Total operating expenses / operating loss | 30.1 | 21.9 |
| Interest income | 1.9 | 1.2 |
| Net loss | 28.2 | 20.6 |
| Net loss per share, basic and diluted | $1.13 | $1.41 |
| Net cash used in operating activities | 27.4 | 17.9 |
Operating expenses rose $8.2 million year over year, reflecting increased clinical-development activity, headcount, compensation, insurance and professional fees. Net loss widened by $7.6 million. Margins are not meaningful because the company had no revenue.
At year-end, cash and cash equivalents were $9.2 million and marketable securities were $52.8 million, totaling $62.0 million. Current assets were $65.0 million and current liabilities were $3.4 million; stockholders’ equity was $65.0 million. The company had no debt reported on its December 31, 2019 balance sheet.
Investing activities provided $26.0 million, primarily from marketable-security sales and maturities, partly offset by purchases. Financing activities provided $0.4 million, principally from option exercises. Cash and cash equivalents decreased by $1.0 million during 2019.
Material changes and subsequent financing
- On March 10, 2020, after year-end, the company borrowed $35 million under a mezzanine term loan. The agreement permits up to $15 million of additional term borrowing if specified revenue and equity-raising milestones are achieved, and provides a revolving facility of up to $5 million, subject to a borrowing base.
- The term loan bears floating interest at the greater of 7.25% or prime plus 2.50%; it is interest-only through March 2022, then amortizes, and matures March 1, 2024. The debt is secured by substantially all assets other than intellectual property, subject to stated exceptions, and includes restrictive covenants.
- Management said year-end cash, cash equivalents and marketable securities, together with the $35 million loan proceeds, were expected to fund planned operations through at least the second quarter of 2021. This is an estimate dependent on assumptions and future spending.
Outlook, risks and unusual items
- Management expected higher R&D, regulatory, manufacturing and commercialization spending and anticipated continued operating losses. The company had never generated revenue and may require further financing.
- Commercialization plans depended on FDA approval, manufacturing scale-up, physician uptake, pricing and reimbursement. The company intended to build a U.S. sales organization of approximately 50–60 representatives.
- Cantharidin supply relied on a supplier in China. The filing cited potential environmental, supplier, trade, foreign-exchange and COVID-19-related disruption risks. As of January 31, 2020, inventory and material on hand or awaiting shipment were stated to support production of more than 15 million applicators.
- Other significant risks include clinical or regulatory setbacks, competition from alternative treatments and permitted compounding, uncertain insurance coverage and reimbursement, and limited patent protection for cantharidin itself.
- Management identified a material weakness in IT general controls and related IT-dependent controls, involving ineffective segregation of duties. No financial-statement misstatement resulted, but disclosure controls and internal control over financial reporting were deemed ineffective at year-end. Remediation was planned for 2020; effectiveness had not yet been established.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not attest to internal control over financial reporting.
Most important facts for investors to verify
- FDA’s decision and timing for the molluscum NDA, including whether additional information or studies are required.
- Actual results and timing of the planned wart trials, and whether Phase 2 findings are confirmed in controlled, late-stage studies.
- Cash use, commercial launch costs and whether the stated runway remains achievable; also review loan covenants, interest, collateral and milestone conditions.
- Progress in validating commercial manufacturing and the resilience of the China-dependent cantharidin supply chain.
- Whether the IT-control material weakness is remediated and controls operate effectively over a sufficient testing period.
- Coverage, reimbursement, market adoption and competition from compounders and other therapies if VP-102 is approved.