VRCA - Verrica Pharmaceuticals: There Is A Silver Lining With YCANTH's Commercialization

2024-01-05 19:05:29 ET

Summary

• Verrica Pharmaceuticals celebrates 5-year listing on Nasdaq after significant YoY rally and notable events, including FDA approval of VP-102 and debt financing agreement.
• Verrica's management is hopeful for the approval of VP-102 in Japan by end of 2024 with plans for double-commercialization launches in the USA and Japan.
• Verrica's cash balance increased more than 100% (YoY) with VP-315 drug candidate for basal cell carcinoma already in Phase 3 study.
• Notable risks to the business includes product roll-out expenses that may increase cash burn in 2024 and disapproval of TO-208 in Japan.

Verrica Pharmaceuticals ( VRCA ) recently celebrated, its 5-year listing on Nasdaq after it rallied 136.46% (YoY). Notable events for the company in 2023 included the FDA’s approval of VP-102 or YCANTHE (the first FDA-approved treatment for molluscum contagiosum) and its $125 million debt financing agreement with diagnostics firm, OrbiMed into H2 2023. While Verrica’s revenue dropped 65.06% (YoY) it indicated an increase of 1,350% (QoQ) at $2.9 million as of Q3 2023.

Thesis

Verrica’s management is hopeful that VP-102 will be approved in Japan by the end of 2024, a move that will see it hit a double-commercialization launch in both the USA and the Asian powerhouse in one year. The news was announced by its drug development partner, Torii Pharmaceuticals which also acts as its commercialization associate. Verrica is also on course to deliver VP-315, the drug candidate for basal cell carcinoma that is already in Phase 3, and VP-103 (Plantar warts drug treatment candidate) which is in Phase 2.

Commercialization logistics

I believe Verrica began the commercialization of YCANTH in the US as they had anticipated by Q4 2023. We expect finer details of the revenue collected (since the $2.9 million recorded is not from product sales but license revenue) in its Q4 2023 as well as FY 2023 reports by March 2024. Better still, VRCA is looking at an annual patient population of at least 6 million in the US with this virus which has no prescribed over-the-counter drug treatments. I am also considering the company's onboarding strategy for US hospitals, pharmacies; Medicaid, and equity groups specializing in the dermatology space that are vital vehicles for this commercialization process.

Reports indicate the US FDA had registered about 75 503B pharmacies that compounded various drug therapies as of H1 2023. In its Q3 2023 financial call, Verrica stated that it had identified at least 3 such pharmacies (able to compound YCANTH or cantharidin) in its internal audit at the time. While this is a small number to begin with, the company’s commercialization will gain traction with time as it rolls out the product into the market. There is also the co-pay program whose introduction will see patients pay about $25 less (per treatment). The drug’s treatment costs an average of $731 (consisting of 0.7% of the topical liquid). This discount is profound considering Mollusca contagiosum mostly affects patients under 14 years with a prevalence rate of 62% in the US alone. It also accounts for almost 1% of all known skin diseases globally, with analysis showing it may increase across varying age groups.

For purposes of medical billing, Verrica is expected to have a permanent J-code most probably by April 2024, a move expected to increase its revenues in the year. VRCA already has a C-code for YCANTH- a temporary billing code for the drug. It will be essential for the company to identify verified pharmacies to avoid the drug being compounded in unsanitary locations that may cause contamination. In my view, Verrica stands to make at least $500 million over the next two years with no competitor in sight- at least from an FDA approval process perspective. Verrica stands to control at least 85% of the market and even so, only about 15% of the cases of molluscum cases are diagnosed meaning that more patients will take up the treatment now that the drug has been endorsed by the FDA. Further, manufacturing challenges made VP-102 to be rejected twice by the FDA indicating a rigorous process will be faced by companies seeking to develop a competitive drug therapy.

Progress in Japan

Verrica’s partner, Torii Pharmaceuticals reported positive top-line results for its Phase 3 TO-208 (marketing name for VP-102) from its trial in Japan. Patients in the study reported proper tolerance levels of the drug indicating a statistical significance against the placebo in the randomized study. What follows now is the submission of the manufacturing/ marketing application of TO-208 by Torii which I expect to be done by H2 2023.

Verrica recorded an $8 million milestone payment from Torii at the beginning of the Phase 3 study based on its licensing agreement (ratified in 2021) from the initial $11.5 million payment. VRCA stands to make an aggregate of $58 million from other development and sales activities to be conducted by Torii for TO-208 while not incurring any other costs on the regulatory approval process in the Asian country. While the actual prevalence rate for Mollusca contagiosum in Japan is yet to be published, known chronic skin diseases such as Prurigo nodularis have recorded an estimate of “72/100,000 among adults aged 18 to 64 years.” By inference, the numbers on Mollusca contagiosum could be more since the disease is known to affect patients from as early as 2 years.

That said, I believe the approval for TO-208 in Japan is likely to occur by Q4 2024 and subsequently, the commencement of its commercialization by Q1 2025. Within the year, I expect the Pharmaceutical and Food Safety Bureau ((PFSB)) of Japan to evaluate Torii's clinical/ non-clinical study as well as the company's new drug approval (NDA) application.

Positive Aspects of 2024

Verrica posted a record cash balance of $84.3 million getting into Q4 2023. This balance represented an increase of 113.4% (YoY) as of Q3 2023. It expects the cash runaway to be sufficient until Q1 2025. In the 12-month trailing to September 2023, Verrica used $29 million in operations and generated $6.6 million from its investing activities. Additionally, it also generated $74.2 million from financing further substantiating its runway claims.

Another important aspect is that Verrica’s VP 315 drug candidate for the treatment of basal cell carcinoma is already in its Phase 3 clinical study. At the moment, the most common treatment for this disease is surgery. However, the FDA approved the prescription drug Aldara cream which was developed by the 3M Health Care. Still, the cream has been known to cause swelling, pain, and peeling among other side effects. These effects make the development of VP-315 essential to lower these carry-over effects some of which are stated to be permanent.

Risk to the Business

Product roll-out expenses

The commercialization process of YCANTH may force the company to realize unforeseen expenses that may derail the entire rollout. Additionally, low market demand may also affect revenue realization since YCANTH is yet in its infancy in terms of its market penetration.

Liability insurance

Verrica stated in its 10-Q that it had reached its per-incident limit insurance coverage of $10 million indicating that it would need to raise the coverage to cover oncoming liabilities. Additionally, the credit terms of the $125 million facility (from OrbiMed) require a limit of $10 million in its restricted cash balance that may in the end affect timely repayments of its loan.

The Japanese question

Failure of TO-208's approval in Japan may affect Verrica's stock's price. As stated the positive topline results are subject to approval by Japan's PFSB which can derail the progress in case of any form of non-compliance.

Valuation

Verrica’s forward price-to-sales ratio is 71.16 against the industry average of 4.08 (representing a difference of 1,645.96%). The price-to-book ((TTM)) ratio stands at 6.77 against the sector average of 2.26 (representing a difference of 199.48%). These metrics show that the stock is slightly overvalued and we may see a downside. However, this position may change upon successful commercialization of YCANTH in the US.

Bottom Line

I recommend holding this stock as the YCANTH’s commercialization process is on course. Unforeseen cash burn during this procedure may affect the stock’s price in the near term. However, it is important to get a clear picture of the company’s sales strategy as we wait for the drug’s approval in Japan.

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