Verrica Pharmaceuticals Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 9, 2023. Amounts below are in millions of dollars unless stated otherwise.
Business context
Verrica is a dermatology therapeutics company. The FDA approved YCANTH for molluscum contagiosum on July 21, 2023, and the company began U.S. commercial operations in August. YCANTH is its first approved product. Its development pipeline includes VP-102 for common and external genital warts, VP-315 for dermatological oncology, and VP-103 for plantar warts.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Product revenue, net | $2.8 | — | $2.8 | — |
| Collaboration revenue | $0.1 | $8.3 | $0.3 | $9.0 |
| Total revenue | $2.9 | $8.3 | $3.1 | $9.0 |
| SG&A expense | $20.1 | $3.9 | $30.3 | $14.2 |
| R&D expense | $6.5 | $2.8 | $15.0 | $9.2 |
| Operating loss | $(23.9) | $1.4 income | $(42.6) | $(15.1) |
| Net loss | $(24.8) | $0.1 income | $(42.4) | $(18.6) |
| Basic and diluted loss per share | $(0.54) | $0.00 | $(0.94) | $(0.58) |
- Revenue comparisons reflect the shift from collaboration milestones to product sales: Q3 and nine-month 2022 collaboration revenue included an $8.0 million Torii milestone payment. Q3 2023 product revenue was from initial YCANTH deliveries to the distributor.
- SG&A increased with launch and commercial build-out; Q3 included $7.4 million of expense related to restricted stock unit vesting. Nine-month stock-based compensation was $12.3 million, versus $3.8 million a year earlier.
- Cash and cash equivalents were $84.3 million at September 30, up from $34.3 million at year-end 2022. Current assets were $91.7 million and current liabilities $11.4 million. Accumulated deficit was $205.8 million.
- Operating cash use was $24.1 million for the first nine months, versus $13.7 million in 2022. Financing provided $74.2 million, including $44.1 million net proceeds from debt and $30.3 million net equity proceeds. Management said cash on hand was expected to fund planned operations into Q1 2025.
- The company reported $42.4 million of debt net of discounts and issuance costs, against $50.0 million gross principal borrowed under its new OrbiMed facility. The five-year facility matures July 26, 2028; further tranches, up to $75.0 million, depend on revenue targets. Interest is cash-pay at the greater of SOFR or 4.00%, plus 8.00%.
- Product gross margin is not a reliable indicator of ongoing economics at launch: $4.5 million of raw cantharidin/API and about $1.2 million of related components and services had been expensed as R&D before approval. The company said previously expensed inventory would reduce reported product cost for approximately nine months.
Outlook, commentary and risks
- No quantified sales or earnings guidance is provided. Management expects significant operating losses and expenses to continue, including costs for YCANTH commercialization and clinical development. It stated that additional financing will be needed and that future capital requirements depend on product sales, development costs, and other factors.
- Management reported more than 112 million U.S. covered lives with positive payer coverage decisions. YCANTH was reimbursed under a miscellaneous J-code; the company expected a permanent J-code to be assigned by January 2024 and published by April 2024. These are company expectations, not confirmed outcomes in this filing.
- Management expected to complete the VP-315 Phase 2 trial in the first half of 2024. It was evaluating Phase 3 timing/design for VP-102 in common and external genital warts and when to begin a VP-103 Phase 2 trial. The FDA held a Type C meeting on common warts on November 6, 2023; meeting minutes were expected within 30 days.
- Commercial revenue was concentrated in one product and one pharmaceutical wholesaler/distributor. The $3.9 million in accounts receivable was from YCANTH sales; the filing reported no doubtful-account allowance. Net product revenue depends on estimates for rebates, chargebacks, returns, patient assistance and other gross-to-net items.
- The OrbiMed debt is secured by substantially all assets, carries covenants including a $10 million minimum unrestricted-cash requirement, and may be accelerated following an event of default. Additional borrowing is conditional on revenue targets; the company said it was in compliance at quarter-end.
- A putative securities class action alleges failures to disclose manufacturing deficiencies related to VP-102. The case was described as being in early stages; the company intends to defend itself. The filing also highlights YCANTH product-liability risks and states that the company carried $10 million of product-liability coverage, which may be insufficient.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether YCANTH prescriptions, distributor inventory, end-user demand, collections and gross-to-net adjustments support repeatable commercial revenue.
- Whether the permanent J-code and reimbursement access develop as management expected, and whether payer coverage translates into utilization.
- Actual cash burn and runway relative to management’s Q1 2025 estimate, including the effects of commercialization spending and clinical programs.
- Progress toward revenue targets required to access additional OrbiMed tranches, compliance with covenants, and the full cost of debt, fees and warrants.
- Clinical and regulatory milestones for VP-315, VP-102 and VP-103, and the outcome of the securities litigation and any product-liability developments.