Journey Medical Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; dollar amounts below are in millions unless noted. Journey is a commercial-stage dermatology pharmaceutical company with nine branded and three authorized generic products marketed in the U.S.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $23.3 | $10.7; up 117% |
| Net product revenue | $20.8 | $10.7; up 94% |
| Operating income (loss) | $(0.9) | $0.6 |
| Net income (loss) | $(1.4) | $0.3 |
| Basic and diluted EPS | $(0.08) | $0.03 basic; $0.02 diluted |
| Operating cash flow | $0.9 | $1.4 |
| Cash and cash equivalents | $41.3 at March 31 | $49.1 at December 31, 2021 |
Product cost of goods sold was $8.2 million, implying product gross profit of approximately $12.6 million and product gross margin of 60.6%, versus approximately 63.5% in Q1 2021. The filing does not provide a separate total-revenue gross margin. Operating expenses rose 139% to $24.2 million, including $14.7 million of selling, general and administrative expense and $1.3 million of R&D. Interest expense was $0.4 million; income tax expense was $0.1 million despite the pretax loss.
Current assets were $90.3 million and current liabilities $61.0 million at quarter-end, a current ratio of approximately 1.48. Total liabilities were $79.5 million and stockholders’ equity $41.4 million. Debt included $14.8 million net outstanding under the EWB term loan, no revolver balance, $6.3 million of license installment payments, and a $4.8 million deferred acquisition payment. Operating cash flow was positive, but receivables increased materially; cash declined $7.8 million during the quarter.
Material changes and business developments
- January acquisition of AMZEEQ and ZILXI from VYNE expanded the portfolio. The company paid $20.0 million at closing; accounting consideration, including the discounted deferred payment and transaction costs, totaled approximately $25.0 million. A further $5.0 million is due in January 2023.
- Product revenue growth reflected QBREXZA, Accutane, and the newly acquired AMZEEQ and ZILXI. QBREXZA generated $7.4 million, Accutane $4.9 million, and AMZEEQ $3.5 million. Declines in Targadox, Ximino, and Exelderm partly offset growth, with generic competition cited for Targadox and Ximino.
- Other revenue of $2.5 million was a net milestone payment related to Japanese approval of Maruho’s Rapifort wipes: a $10.0 million payment to Journey, offset by $7.5 million payable to Dermira. The filing said Japanese product launch was expected in May 2022.
- Operating expenses increased substantially, driven by salesforce expansion, marketing, legal expenses, and R&D costs for DFD-29. First patient dosing in the Phase 3 DFD-29 rosacea program occurred in March; management expected R&D expense to increase as enrollment progressed.
Outlook, commitments, and risks
Management stated that existing cash, operating cash generation, and the EWB facility were expected to fund operations for the next 12 months from issuance of the statements. It also expects expenses to increase as it develops and commercializes products, pursues acquisitions, and bears public-company costs. The company may need additional financing; unavailable or unacceptable financing could curtail portfolio expansion and adversely affect its strategy.
- EWB facility: $10.0 million revolving line and term-loan capacity of up to $20.0 million, both maturing January 2026. Journey borrowed $15.0 million in January 2022; it may elect to borrow another $5.0 million through June 2023. The loans bear floating interest and include financial covenants, including minimum liquidity provisions.
- Additional potential obligations include VYNE sales milestones, up to $450 million as described in the agreement; DFD-29 contingent milestones of up to $163.0 million, royalties, and approximately $24.0 million of planned Phase 3 trial funding; and royalties and other payments under product licenses.
- Patent disputes create uncertainty around generic entry. QBREXZA litigation against Perrigo had a September 2022 trial scheduled and a stay then due to expire in March 2023; separate QBREXZA litigation against Teva was also disclosed. Journey had assumed the AMZEEQ patent case against Padagis, with trial scheduled for July 2023. A ZILXI patent complaint against Padagis was filed May 2, 2022, after quarter-end. The company said it could not predict the outcomes or timing.
- Management said COVID-19 had not materially affected the business to date, but a continuing pandemic could adversely affect results. Product-return, rebate, coupon, and other gross-to-net estimates are significant and actual results may differ. The company also cited competitive pressure from generics.
Management reported disclosure controls were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new-product sales growth can offset ongoing declines in legacy products and sustain or improve product gross margin.
- Receivables, inventory, and gross-to-net reserves: receivables rose to $31.2 million, inventory to $16.1 million, and accrued coupons and rebates remained significant.
- Cash runway and covenant headroom, considering the $5.0 million January 2023 VYNE payment, floating-rate EWB debt, and the timing of expected operating cash flows.
- Enrollment, cost, and clinical outcomes for DFD-29 Phase 3 trials, plus the commercialization progress of AMZEEQ, ZILXI, and Rapifort in Japan.
- Outcomes and timing of QBREXZA, AMZEEQ, and ZILXI patent proceedings and possible generic competition.
- Potential impact of milestone, royalty, and development commitments, including obligations whose amounts depend on sales or regulatory outcomes.