Journey Medical Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Journey is a commercial-stage dermatology pharmaceutical company with nine branded and three authorized generic prescription products marketed in the U.S. Figures below are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $18.3 | $15.3 | $41.6 | $26.0 |
| Operating loss | $(7.1) | $(13.8) | $(8.0) | $(13.2) |
| Net loss | $(7.5) | $(11.9) | $(8.9) | $(11.6) |
| Net loss per share, basic and diluted | $(0.43) | $(1.30) | $(0.51) | $(1.27) |
| Cash used in operating activities | — | $(2.4) | $(6.1) |
- Q2 product revenue was $18.2 million, up 19%; six-month product revenue was $39.0 million, up 50%. Other revenue was $2.6 million for the half year, principally a net milestone payment from the Japan licensing partner, Maruho.
- Gross margin, calculated as revenue less product cost of goods sold divided by revenue, was approximately 58% in Q2 and 62% for the first half. Comparisons are affected by product mix and acquisition-related inventory and amortization costs.
- Q2 selling, general and administrative expense rose 95% to $15.2 million; first-half SG&A rose 113% to $29.9 million. R&D was $2.6 million in Q2 and $3.9 million for the half, mainly for DFD-29 clinical trials.
- Cash and cash equivalents were $38.1 million at June 30, down from $49.1 million at year-end 2021. Current assets were $83.9 million and current liabilities $60.1 million. Six-month investing cash outflow was $20.0 million, primarily for the Vyne product acquisition; financing provided $11.5 million.
- Debt included a $14.8 million net EWB term loan balance; the $10.0 million revolving line had no amount outstanding. The company had $6.4 million of net license installment obligations and a $4.9 million current deferred cash payment for the Vyne acquisition. EWB debt bears floating interest; the term loan’s stated effective rate was 7.0% at June 30.
Material changes versus the prior comparable period
- Qbrexza and Accutane revenue grew, and the January 2022 acquisition added Amzeeq and Zilxi sales. Q2 revenue also included $56,000 in royalties from Japan; first-half other revenue included the $2.5 million net milestone payment.
- Declines in Targadox, Ximino and Exelderm reflected generic competition and, for Exelderm and certain other products, contract-manufacturer shortages. Management said the shortages were resolved in July 2022 and inventory was again available.
- Net losses narrowed year over year, partly because the 2021 comparison included $13.7 million of acquired-license R&D expense. Higher SG&A and current-period DFD-29 development costs partly offset the improvement. Lower interest expense also reflected conversion of preferred shares at the November 2021 IPO.
- The Vyne acquisition added $20.0 million of cash consideration and a $5.0 million payment due in January 2023. It added Amzeeq and Zilxi and potential product-specific sales milestones of up to $450 million in total.
Outlook, risks and notable items
- Management stated that cash, operating cash generation and the EWB facility were expected to fund operations for the next 12 months. The company was in compliance with EWB covenants at June 30. On August 2, 2022, it elected to borrow the additional $5.0 million EWB term-loan tranche.
- Management expected DFD-29 Phase 3 expenses to increase as enrollment progressed. Enrollment had reached 43%; topline results were expected in the first half of 2023 and an NDA filing in the second half of 2023. These are forward-looking expectations, not guarantees.
- Management expects increased spending on business development, commercialization, marketing, public-company operations and product development. It cautioned that unavailable or unacceptable financing could curtail portfolio expansion. Floating-rate borrowing exposes the company to higher interest costs if rates rise.
- DFD-29 requires estimated Phase 3 funding of approximately $24 million and carries potential regulatory and commercial milestone payments up to $158 million, plus royalties. Other acquired products also have milestone and royalty obligations.
- The company reported no material COVID-19 impact to date but warned that future effects could be adverse. It also recorded a full valuation allowance against deferred tax assets.
- Patent litigation involving Qbrexza, Amzeeq and Zilxi was settled with Padagis in May 2022; the cases were dismissed. Under the settlements, Padagis is prohibited from launching generics before August 15, 2030, July 1, 2031 and April 1, 2027, respectively.
- Fortress owned 58% of outstanding common stock at June 30. Class A common stock has enhanced voting rights and the right to elect a board majority during the specified director period.
Most important facts for investors to verify
- Whether growth in Qbrexza, Accutane, Amzeeq and Zilxi offsets generic pressure and manufacturer-related supply disruption in other products.
- Whether gross-to-net reserves, product returns and rebate obligations remain adequate as the portfolio and sales mix change.
- DFD-29 trial enrollment, timing, clinical results and future development funding needs against management’s stated milestones.
- Cash use, the post-quarter $5.0 million borrowing, floating-rate debt costs, covenant compliance and the January 2023 Vyne payment.
- Execution of the Padagis settlements and the practical commercial value of their agreed generic-entry dates.
- The scale of contingent milestone, royalty and other license obligations, which may increase if sales or development milestones are achieved.