Verrica Pharmaceuticals Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited financial statements. Verrica is a clinical-stage dermatology therapeutics company with no approved products and no product-sales revenue.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $5.0m | $3.0m | $13.4m | $11.5m |
| General and administrative expense | $4.6m | $3.5m | $14.7m | $10.6m |
| Net loss | $10.5m | $6.1m | $29.7m | $20.6m |
| Net loss per share, basic and diluted | $0.42 | $0.24 | $1.19 | $0.83 |
| Operating cash used | Not reported quarterly | Not reported quarterly | $24.1m | $19.2m |
At September 30, cash and cash equivalents were $17.2m and marketable securities were $54.7m, totaling $71.9m. Total assets were $79.9m; stockholders’ equity was $39.2m. Net cash increased $8.0m over the first nine months, mainly because of $34.5m net proceeds from debt issuance. There is no meaningful product margin because the company has no product sales.
The company had $35.0m gross term debt, reported as $35.0m current debt net of discounts and issuance costs. Term loans carry a floating rate with a 7.25% floor, mature March 2024, and include a $3.75m final payment fee. Nine-month interest expense was $2.0m. The company also had a $5.0m revolving facility, subject to borrowing-base limits.
Changes versus comparable periods
- Q3 operating expenses rose $3.1m year over year; net loss widened $4.4m. For the nine months, operating expenses increased $6.1m and net loss widened $9.1m.
- Higher R&D expense primarily reflected increased VP-102 chemistry, manufacturing and controls (CMC) work and compensation, partly offset by lower clinical costs. Higher G&A reflected increased headcount, insurance, professional fees, other operating costs, and pre-commercial activity.
- Interest expense increased following the March 2020 mezzanine borrowing, while interest income declined amid lower rates.
- Operating cash use increased by $4.9m year over year for the nine-month period.
Outlook, risks, and unusual items
- FDA review: In July 2020 the FDA issued a Complete Response Letter for VP-102 for molluscum, citing additional CMC information and human-factors validation; it identified no clinical deficiencies. Verrica planned to resubmit the NDA in Q1 2021. Approval timing remains uncertain.
- Clinical programs and COVID-19: The pandemic delayed planned Phase 3 common-wart trials for VP-102 and a Phase 2 plantar-wart trial for VP-103. Management said results through Q3 were not significantly affected, but future effects remain uncertain. A Phase 2 external-genital-wart study was ongoing, with topline data expected in H2 2020.
- Liquidity and debt covenant: The October 26, 2020 loan amendments added a minimum liquidity covenant requiring specified cash, equivalents and securities at Silicon Valley Bank to exceed 1.5 times obligations to mezzanine lenders. Management said a breach was probable at some point in the next 12 months without additional financing. Debt was classified as current because of the expected covenant issue and subjective acceleration clauses. The company nevertheless said it believed it had funds for operations for at least 12 months from issuance of the statements, even if debt became due, and expected existing funds to support planned operations through Q4 2021.
- Up to $15m in additional term loans is conditionally available: $5m upon FDA acceptance of the resubmitted NDA by March 31, 2021, and $10m subject to FDA approval by September 30, 2021 and covenant compliance. The company stated that additional financing may be needed.
- Licensing: Torii paid $0.5m for an exclusive Japan option relating to molluscum and common-wart candidates; the amount was recorded as deferred revenue. The Lytix agreement for LTX-315 includes a $0.3m upfront payment, a $2.3m near-term regulatory milestone, up to $111m in contingent milestones, and tiered royalties.
- Contingencies: A putative securities class action filed in July 2020 alleges disclosure failures concerning VP-102 safety risks and approval delays. Verrica disputes the claims; the potential loss cannot be estimated.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2020 because of an IT general-controls material weakness involving segregation of duties and related controls. Remediation had begun but was not yet considered complete.
- Management expects substantial ongoing losses and increased spending on development, regulatory work, manufacturing scale-up, and potential commercialization. There is no assurance that products will be approved or generate revenue.
Important facts for investors to verify
- Progress and timing of the VP-102 NDA resubmission, FDA acceptance, and resolution of CMC and human-factors issues.
- Cash runway, spending rate, and compliance with the amended minimum-liquidity covenant; whether additional financing or conditional loan tranches are obtained.
- Impact of COVID-19 on delayed trials, enrollment, suppliers, and regulatory timelines; status of the external-genital-wart trial and data expected in H2 2020.
- Developments in the securities class action and any change in the company’s ability to estimate exposure.
- Whether remediation of the IT-related material weakness is completed and controls are subsequently tested as effective.