Verrica Pharmaceuticals Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Verrica is a clinical-stage dermatology therapeutics company with no approved products and no product-sales revenue. Its lead candidate, VP-102, is being developed for molluscum contagiosum, common warts and external genital warts.
Financial performance and position
- Revenue: $12.0 million, versus none in Q1 2020. This was license revenue under the Torii agreement, not product sales. It included the $0.5 million option payment received in 2020 and an $11.5 million upfront payment received in April 2021, recorded as a receivable at quarter-end.
- Operating expenses: $11.94 million, up $2.06 million year over year. Research and development was $5.36 million, including a $2.3 million Lytix milestone payment, partly offset by lower VP-102 CMC and clinical costs. General and administrative expense rose to $6.58 million, reflecting headcount, insurance, professional fees and pre-commercial activity.
- Profitability: Operating income was $0.06 million, compared with an operating loss of $9.88 million in Q1 2020. Interest expense rose to $1.03 million; net loss was $0.94 million, versus $9.82 million. Basic and diluted net loss per share was $0.04.
- Cash flow: Operating activities used $10.79 million, compared with $7.91 million in Q1 2020. The $11.5 million Torii receivable was a major working-capital outflow. Investing activities provided $10.84 million, principally from net maturities and sales of marketable securities. Financing activities provided $33.37 million, including $28.15 million net stock-offering proceeds and $4.98 million of debt proceeds. Cash increased $33.42 million to $44.10 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $87.69 million at March 31, 2021. Current assets were $102.05 million and current liabilities $44.66 million; the latter included all reported debt as current.
- Debt: Gross term-loan proceeds totaled $40.0 million; debt net of accrued final payment fee and unamortized costs was $40.67 million. Loans mature March 1, 2024, with interest-only payments through March 2022 unless additional eligible borrowing extends that period. Term-loan interest has a 7.25% minimum rate; a $3.75 million final payment fee also applies.
Material changes and business developments
- Verrica closed a March follow-on offering of 2,033,899 shares at $14.75 per share, raising $28.1 million net. Shares issued increased to 27.60 million from 25.55 million at year-end 2020.
- Torii exercised its option and signed an exclusive Japan license for cantharidin-based products for molluscum and common warts, including VP-102. The agreement provides an $11.5 million upfront payment, up to $58 million in development, regulatory and sales milestones, and tiered product-supply payments in the mid-30% to mid-40% range of net sales.
- Operating cash use increased year over year, while the reported net loss narrowed substantially because of the one-time Torii license revenue. This revenue should not be treated as recurring product revenue.
Outlook, risks and contingencies
- Management expects existing cash, cash equivalents and marketable securities at quarter-end, together with the April Torii payment, to fund planned operations through at least the second quarter of 2023. Verrica expects continued significant expenses and operating losses and may need additional financing.
- The company was in compliance with loan covenants at March 31, 2021, but management considered it probable that it would fail the minimum-liquidity covenant at some point in the next 12 months without additional financing. Because of this assessment and lenders’ subjective acceleration rights, all term debt and final payment fees were classified as current. Management nevertheless believed it could meet operating needs for at least 12 months from issuance of the statements.
- Failure to meet covenants or other specified defaults could allow lenders to accelerate repayment and exercise security rights. Debt is secured by substantially all assets other than intellectual property, subject to stated exceptions. An additional $10 million term loan is conditionally available if VP-102 receives FDA approval before September 30, 2021 and liquidity-covenant conditions are met.
- The FDA accepted the resubmitted VP-102 molluscum NDA; its PDUFA goal date was June 23, 2021. The prior Complete Response Letter cited CMC and human-factors matters, not clinical deficiencies. The filing does not report the outcome of that pending review.
- Verrica was evaluating an additional Phase 2 study of VP-102 for common warts following FDA feedback. COVID-19 had delayed planned common-wart Phase 3 and VP-103 plantar-wart Phase 2 trials. An FDA end-of-Phase-2 meeting for external genital warts was requested for Q1 2021; LTX-315 IND submission was planned for the second half of 2021.
- Key risks include clinical and regulatory uncertainty, manufacturing and supply dependence, competition including compounded cantharidin, reimbursement and market acceptance, financing needs, and the effects of COVID-19. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether VP-102 received FDA approval by the June 23, 2021 PDUFA goal date and whether further CMC or human-factors work was required.
- Subsequent liquidity and covenant compliance, including whether the Torii payment was received as stated and whether debt acceleration risk changed.
- Actual cash burn and spending relative to management’s runway estimate through Q2 2023, given continuing trial, commercialization-readiness and financing needs.
- Progress and timing of planned wart trials, the LTX-315 IND, and any milestones or supply economics under the Torii agreement.
- The terms and potential impact of the $40 million debt, including the final payment fee, prepayment fees and any additional covenant-triggered obligations.