Verrica Pharmaceuticals Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly results are also provided. The company is a clinical-stage dermatology biotechnology company with no approved products and no product revenue.
Business context and development
Verrica’s lead candidate, VP-102, is a topical cantharidin drug-device combination being developed initially for molluscum contagiosum and common warts. VP-103 is planned for plantar warts. The company intends to commercialize in the United States with its own focused sales organization if products are approved.
After year-end, in January 2019, Verrica reported positive top-line results from two Phase 3 molluscum trials, CAMP-1 and CAMP-2. These post-period results are not 2018 operating results.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $12.8 million | $3.7 million |
| General and administrative expense | $9.1 million | $0.7 million |
| Total operating expenses | $21.9 million | $4.5 million |
| Net loss | $20.6 million | $4.5 million |
| Net loss per share, basic and diluted | $1.41 | $1.56 |
| Net cash used in operating activities | $17.9 million | $4.6 million |
There are no meaningful revenue or profit margins to report because the company has not generated revenue. Interest income was $1.2 million in 2018, compared with none in 2017, largely reflecting investment of financing proceeds.
At year-end, cash and cash equivalents were $10.3 million and marketable securities were $79.5 million, for combined cash, cash equivalents and marketable securities of $89.8 million. Total current assets were $91.2 million; total current liabilities were $2.5 million; total assets were $91.9 million and stockholders’ equity was $89.4 million. The filing reports no material financing commitments such as credit lines, and no debt balance is reported.
Investing activities used $79.9 million, primarily to purchase marketable securities, not to fund operating expenses; financing activities provided $99.4 million. Verrica raised $78.4 million net from its June 2018 IPO and $21.0 million gross from Series C preferred stock before the IPO. Management believes available funds will support operations and capital expenditures at least through the end of 2020, subject to assumptions and the pace and cost of development.
Material changes versus 2017
- Net loss increased by $16.2 million, as R&D and G&A expenses rose substantially with clinical development, staffing, stock compensation and public-company costs.
- R&D expense increased $9.1 million, primarily from Phase 2 and Phase 3 VP-102 activity, added personnel costs and a consulting charge related to the former Chief Scientific Officer.
- G&A expense increased $8.3 million, reflecting increased staffing and compensation, insurance, professional fees and other costs of becoming a public company.
- Cash and investments increased significantly following the IPO and preferred-stock financing; the company invested much of the proceeds in marketable securities.
Outlook, commentary and key risks
- Development plans: Management planned to submit an NDA for VP-102 in molluscum in the second half of 2019; report COVE-1 Phase 2 common-wart top-line results in the second quarter of 2019; initiate a Phase 2 external-genital-wart trial in the first half of 2019; and submit an IND for VP-103 in plantar warts in the second half of 2019.
- Clinical results: CAMP-1 and CAMP-2 reported complete lesion clearance at Day 84 in 46% and 54% of VP-102 subjects, respectively, versus 18% and 13% on placebo (p<0.0001). Mean lesion reductions were 69% and 83%, compared with a 20% increase and a 19% reduction on placebo. Reported adverse events were primarily mild to moderate application-site reactions; no treatment-related serious adverse events were reported.
- Spending and commercialization: Management expected R&D and G&A expenses to rise, including costs for trials, regulatory work, manufacturing scale-up and preparation for potential commercialization. It envisioned a U.S. sales team of approximately 50–60 representatives.
- Funding risk: Verrica expects continuing losses and may need additional capital; further financing may dilute shareholders or require restrictive terms or concessions. There is no assurance products will be approved or generate commercial revenue.
- Supply and manufacturing: The company has no manufacturing facilities and relies on third parties. Cantharidin is naturally sourced from suppliers in China, creating supply, regulatory, environmental, currency and geopolitical risks. Commercial applicator assembly also needs to scale beyond the manual process used to date.
- Regulatory, competitive and market risks: NDA review and drug-device combination requirements may delay approval. NCE and pediatric exclusivity are not assured; patent applications are pending and do not claim cantharidin itself. Compounded cantharidin may remain a competitor in certain circumstances. Market size, physician adoption, reimbursement and pricing assumptions may not be realized.
- Unusual accounting item: In the fourth quarter, the company changed its stock-compensation attribution method from graded to straight-line and applied the change retrospectively. The 2018 reported net loss was $1.5 million lower than it would have been under the previous method; operating cash flow was unchanged.
- Other disclosures: The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls were effective at year-end. The filing reports no material legal proceedings.
Important facts for investors to verify
- Final, complete Phase 3 CAMP-1 and CAMP-2 data and whether the FDA accepts the planned NDA, including the implications of the SPA.
- Actual NDA timing, review outcome, labeling, safety requirements and whether VP-102 receives NCE or pediatric exclusivity.
- COVE-1 results and progress of the external-genital-wart and VP-103 programs against stated timelines.
- Quarterly cash burn, investment liquidity and whether the stated funding runway through 2020 remains valid as clinical and launch-preparation spending increases.
- Reliability and scalability of Chinese cantharidin supply, manufacturing arrangements and commercial-scale applicator production.
- Coverage, reimbursement, pricing, physician uptake and the extent of ongoing competition from compounders and other therapies.