Good morning, ladies and gentlemen, and welcome to the Verrica Pharmaceuticals Fourth Quarter and Year End 2023 Corporate Update and Earnings Conference Call. As a reminder, this conference is being recorded. I'll now turn the call over to our host Kevin Gardner of LifeSci Advisors. You may begin your conference.

Thank you, operator. Hello, everyone and welcome to Verrica Pharmaceuticals fourth quarter and year end 2023 corporate update and earnings conference call. With me on the line this morning are Ted White, President and Chief Executive Officer of Verrica Pharmaceuticals; Joe Bonaccorso, Chief Commercial Officer; Terry Kohler, Chief Financial Officer; Dr. Gary Goldenberg, Verrica's Chief Medical Officer; and Chris Hayes, Verrica's Chief Legal Officer. As a reminder, during today's call, management will make forward looking statements. These statements may include expectations related to the launch and commercialization of YCANTH for the treatment of molluscum contagiosum in the United States, regulatory development, the development of Verrica's product candidates, our expected cash runway as well as overall business strategy and planned operations. These forward-looking statements are based on the company's current expectations and involve inherent risks and uncertainties. And based on those risks and uncertainties, Verrica's actual results and timing of events could differ materially from those anticipated in such forward-looking statements. Please see the Verrica's SEC filings for important risk factors. Verrica cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website. I'll now turn the call over to Verrica's President and CEO, Ted White. Ted?

Thank you, Kevin and good morning, everyone, and thank you for joining us for our fourth quarter and year end 2023 earnings call. I'd like to begin today's call by providing an update on Verrica's commercial launch since our last quarterly earnings call back in November. I'll then ask our Chief Commercial Officer, Joe Bonaccorso to provide a more detailed review of our commercial activities and YCANTH launch. Following Joe's remarks, our Chief Financial Officer, Terry Kohler will review our fourth quarter and year end financial results. We'll then open up the call to take your questions. First and foremost, the organization continues to be focused on our top priority the launch of YCANTH, which is the first and only commercially available FDA approved treatment for molluscum contagiosum. With our first full quarter of commercial operations now complete, we're beginning to see traction in many of our targeted dermatology and institutional accounts as we execute our launch plan. Our fourth quarter execution resulted in $1.9 million in YCANTH net revenue, which we believe demonstrates our continued progress in driving adoption and reflects growing confidence in our prescriber base as we work to expand coverage of YCANTH to over 200 million commercial and Medicaid lives at the end of the year. As a further update on covered lives in December, we agreed to terms and coverage under the medical benefit with two of the largest PBMs. We're working to finalize those agreements. However, coverage under those medical plans became effective. In addition to expanding our lives covered, on January 29th, we announced that the CMS issued a permanent J-code J7354 for YCANTH, which is under the Healthcare Common Procedure Coding System process. We expect that J-code for YCANTH will become fully published on April 1st, securing that J code for YCANTH represents a critical milestone in our commercial strategy, as J-code enables providers to use the same code across all payers for reimbursement. We believe the J code will help grow YCANTH utilization among the U.S. Medicaid patient populations and increase overall buy-and-bill account utilization by simplifying the billing and reimbursement process for YCANTH. In the fourth quarter, Verrica also expanded our YCANTH product distribution capabilities when we entered into an agreement with Walgreens to distribute YCANTH through a specialty pharmacy. Walgreens joins Verrica's existing specialty pharmacy, Nufactor, who continues to be instrumental in helping the company distribute YCANTH among institutions, dermatology, and pediatric medical practices. The Walgreens partnership is exciting as we look forward to the opportunity to grow that relationship and leverage Walgreens' physical footprint and existing relationships with derm-on-call to build community awareness and grow treatment rates. On February 1st, we executed a distribution agreement with DMS Pharmaceutical, a prime vendor to the U.S. Department of Defense to provide YCANTH to U.S. Military installations around the world. The DMS relationship was in direct response to outreach from the U.S. Military treatment facilities requesting information on how to procure YCANTH for Military Personnel. As the fourth quarter came to a close, we transitioned into the first quarter, we saw wins on the institutional side of our business with major IDNs and hospitals adding YCANTH to formulary and placing orders. We expect these wins to continue as we see more success in our efforts to combat unapproved compounding cantharidin along with the anticipated publishing of the J code on April 1st. Now, I'd like to give you an update on our efforts to eliminate the amount of compounding being improperly compounded for the treatment of molluscum. As you know, we have consistently taken the position that we intend to fully exercise our legal rights and execute on our multi-prong strategy to clear the market of significant suppliers for unlawfully compounded cantharidin. At the same time, we've cautioned you that we may not see the results of our efforts immediately; rather, we have said that as the cumulative effects of our plan started to take effect, we'd expect to see noticeable reductions in the availability of compounded cantharidin within a 12-month period. Well, we believe we're on track and well on our way to hit our timeline. For example, the last 503B pharmacy in the United States on the FDA's outsourcing facility product report that reported compounding cantharidin has discontinued compounding cantharidin and informed its over 400 institutional customers of the availability of YCANTH. In addition, a number of large national licensed 503A pharmacies have also agreed to discontinue compounding cantharidin. Consistent with this reduction in the supply of compounded cantharidin, we are regularly hearing in the market about the lack of availability of compounded cantharidin and receiving inbound requests for YCANTH from providers who are also informing us that they can no longer obtain compounded cantharidin. As we witness the available supply of compounded cantharidin in the United States significantly decrease, we are further escalating our efforts to ban the illegal importation of compounded cantharidin from Canada and specifically, the illegal importation of non-FDA approved cantharidin products from Dormer Labs in Canada. Similar to the actionable results we saw from our efforts with the 503A and 503B pharmacies, we believe that as we continue to execute and escalate our intended strategies, the illegal importation of cantharidin from Canada will be discontinued. I'd now like to provide an update on our pipeline. On January 5th, we announced that the last patient has been dosed in Part 2 of the company's Phase 2 trial for VP-315, a potential first-in-class oncolytic peptide for the treatment of basal cell carcinoma or BCC. VP-315 is a peptide that has been engineered to provide more targeted delivery to stimulate the patient's immune system and destroy cancer cells. We remain excited about the opportunity for this asset, which we view as either a potential non-surgical alternative to Mohs surgery or as a neoadjuvant chemotherapeutic for a larger base of basal cell carcinomas, including advanced tumors or non-resectable basal cell. The ongoing Phase 2 trial is a two-part, open-label, multicenter, dose escalation, proof-of-concept study with a safety run-in designed to assess the safety, pharmacokinetics, and efficacy of VP-315 when administered intravitreally in adults with biopsy-proven BCC. The study enrolled 92 adult subjects with a histological diagnosis of basal cell carcinoma in at least one eligible target lesion. Our interpretation of the data from this study will focus on complete clearance as well as overall tumor shrinkage in patients who may have residual tumors. We expect initial results from the study in the first half of 2024. From an ex-US perspective, in December, we announced that Verrica’s development and commercialization partner, Torii Pharmaceutical, reported positive top-line results from a Phase 3 trial of TO-208, which is marketed as YCANTH in the United States for the treatment of molluscum in Japan. The top-line results show that the proportion of subjects achieving complete clearance of all treatable molluscum lesions at the completion of the confirmatory study, the primary endpoint of efficacy was statistically significant versus placebo. TO-208 demonstrated similar results to YCANTH Phase 3 program and was well-tolerated during the study. Torii intends to submit a manufacturing and marketing application for the product in Japan based on the results of the Phase 3 trial and other studies currently being conducted. In addition to molluscum, as we disclosed on January 4, we announced alignment with the FDA with respect to the Phase 3 clinical development plan for YCANTH for the treatment of common warts, following our Type C meeting. More specifically, we reached agreement with the FDA on the overall design components of a pivotal Phase 3 study for YCANTH that would support an efficacy supplement for the proposed indication of common warts. We will be seeking additional FDA feedback on our updated clinical design in the second quarter of this year.

Thanks very much, Ted. As Ted mentioned, we had our first full quarter of commercial operations and we are gaining increasing traction among dermatology practices, pediatricians, and institutions. There is significant and growing interest in prescribing and adopting YCANTH among physicians and broad acceptance on the payer side. We also feel our agreement with DMS and the opportunity with the DoD will further accelerate adoption. Since our last call, insurance coverage of YCANTH has grown significantly. We have increased our number of covered lives from approximately 112 million and now over 200 million in both commercial and Medicaid. Our coverage includes major PBMs such as CVS, ESI, and Optum. I'm pleased to say that our coverage metric has exceeded our internal expectations and we believe this will ultimately translate into an acceleration in prescription growth of YCANTH over the next several months. In addition to our market access work, our sales force reach has expanded over the last five months. With over 4,000 healthcare professionals trained, we are seeing major integrated delivery networks adopt YCANTH with both the Mayo Clinic and Kaiser Permanente beginning to order products through our distribution partner Triple-S. We're also continuing to work to gain adoption with private equity-backed dermatology and pediatrician group practices. In support of our field efforts, we have expanded our sales footprint to 53 territories from 50 at launch. We're also adding two additional hospital reps as we continue to focus on driving adoption on the institutional side. With HCPs at major IDNs beginning to adopt and with several other significant formulary wins, the incremental hospital reps will be critical in driving demand, pulling through orders, and maximizing the market opportunity. We are also working towards adding two major hospital GPOs and utilize their support to drive further adoption. In addition, we're adding 14 pediatric reps in the first quarter, and we plan to have a total of 20 pediatric reps in the field by the end of the quarter. Our focus on the pediatric footprint is fueled by encouraging inbound traffic, which is consistent with our internal market assessment of the molluscum diagnosis from pediatric practices across the country. Due to the size of the pediatric market, our plan is designed to be efficient around major MSAs and we will continue to work in coordination with our physician buying group partner, Main Street Vaccines and pediatric-focused GPOs. I also wanted to touch again on the J-code. According to Ted's earlier comments, the receipt of the J-code is expected to be a significant driver of adoption among dermatologists for YCANTH. We believe that the J-code, which is expected to be published on April 1, will streamline reimbursement, accelerate benefit verifications, and provide consistent reimbursement, which is more challenging with a miscellaneous J-code. We have received supportive feedback from practitioners since we announced our J-code receipt, and we are working hard to educate the market and prepare for our code becoming effective on April 1 of this year.

Thanks, Joe. YCANTH revenues were $1.9 million in the fourth quarter of 2023, with total 2023 revenue for YCANTH of $4.7 million. This revenue represents the continued fulfillment of ex-factory orders to our distribution partner, FFF Enterprises as we continue to build awareness, drive adoption, and expand insurance coverage and formulary access. In addition, the Q4 units were partially in support of our expanded distribution footprint with the addition of Walgreens as a second specialty pharmacy partner. We also recognized collaboration revenues of $122,000 in the fourth quarter of 2023 and $466,000 for the full year 2023 related to the clinical supply agreement with Torii Pharmaceuticals. Gross product margins for the full year 2023 were 94%, which continued to benefit from certain components of standard cost of goods sold, including bulk production and assembly of applicators from our registration batches, having been expensed as R&D prior to approval. Research and development expenses of $5.3 million in the fourth quarter of 2023 declined versus the third quarter of 2023 by $1.2 million, primarily driven by reduced stock compensation expense. For the full year 2023, R&D expenses increased to $20.3 million from $12.2 million in 2022, driven by increased CMC costs related to the pre-approval activity, increased clinical trial costs for the VP-315, as well as an increase in stock-based compensation expense. Selling, general and administrative expenses of $17 million in the fourth quarter of 2023 declined versus the third quarter of 2023 by $3 million, driven primarily by a reduction in stock-based compensation expense. For the full year 2023, selling, general and administrative expenses increased to $47.3 million from $17.4 million for the full year 2022. The incremental spend was primarily driven by the approval and launch of YCANTH during 2023 and an increase in stock-based compensation expense. GAAP net loss was $67 million or $1.48 per share for fiscal 2023 compared to a GAAP net loss of $24.5 million or $0.72 per share for the prior year. On a non-GAAP basis, which excludes stock-based compensation and non-cash interest expense, the full year 2023 net loss was $51.8 million or $1.14 per share compared to a net loss of $17.4 million or $0.51 per share in full year 2022. And finally, as of December 31, 2023, Verrica had aggregate cash and cash equivalents of $69.5 million. The Company expects its cash and cash equivalents as of December 31, 2023 will be sufficient to fund operations into the second quarter of 2025. And I'll now turn the call back to Ted for closing remarks.

Thanks, Terry. I'm very pleased with the productivity that Verrica continues to make across its commercial efforts and our pipeline. We are executing across our entire business, and we believe our success is translating into growing awareness and utilization of YCANTH as the first FDA-approved therapy indicated for molluscum contagiosum and the only commercially available FDA approved treatments. We continue to forge excellent relationships with dermatology and pediatrician practices, and we believe that our efforts to increase lives under coverage is laying the foundation for the expansive coverage needed to maximize the commercial opportunity for YCANTH. At the same time, we're taking steps to ensure that patients have access to a safe, FDA-approved product. That concludes our formal remarks, and I'll now turn the call over to the operator for Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first question is from Stacy Ku of TD Cowen. Please go ahead.

Thanks for taking our questions, and congratulations on all the nice progress. So we had a few questions. So first, can you provide a little bit more detail around the IDN contribution and any insights into additional institutions that are pending or you've added recently, just some metrics around that, and whether you have a goal post in mind of additions by year end. It seems like some easy kind of low-hanging fruit to really convert. I understand it takes a little bit of time to kind of establish the infrastructure, but any details would be really appreciated? So that's the first question. And then the second question is, can you provide any type of commentary around how clinicians are using YCANTH at this point to just provide the most updated current split between specialty pharmacy, white bag service versus buy and bill? So that's the second question. And then the third is just very early. I know it's very early, but are you getting a sense of how the adopters are using the product? Are they treating to clear? Thanks so much.

Thanks for the question, Stacy. I'll turn that over to Joe Bonaccorso.

Good morning, Stacy. To answer your first question around the IDNs, we have obviously a fully implemented strategy. It's a great opportunity for YCANTH. We have Kaiser Permanente and Mayo currently ordering, and we've got several other IDNs close to the finish line with formulary approval and expected first order sometime in quarter two. We'll continue to look at and prioritize by the largest opportunity. And then there's other strategies around some of the smaller IDNs and health systems throughout the country, hence the expansion in the institutional field force to help drive that even more. Second question around, I believe it was around how the dermatology or the split between specialty pharmacy and buy and bill, that's as you would expect with a miscellaneous J-code start. It's been leaning more towards white bag specialty pharmacy with about 80% of the volume going through there and 20% buy and bill. And that's a compilation of physician offices in our health systems as well. We expect the buy and bill component of this launch to grow. The permanent J-code expected to be published on April 1. And then the last question, I believe, was around treat to clear. We're seeing dermatologists following that algorithm to want to treat the patient to clearance. Everything we've seen so far in the anecdotal feedback we've gotten from our customers is pointing in that direction, that they want to get through a full course of therapy with the patient. And obviously their assessment on when they think the patient is cleared and doesn't need anything else.

That's helpful. If I could ask a quick follow-up on the IDN contribution, what percentage should we anticipate for this type of contribution in 2024 compared to the guidance consensus of around $20 million for the year? Thank you.

Yeah. So I think when you look at our hospital opportunity and you look at these facilities as best you can on a per patient per month opportunity. So we would think about 30% of our volume should be coming from the institutional side of the business, I would say approximately. That's what we're kind of thinking through right now. That may accelerate more as we continue to adopt on the J-code. And you also got to look at this, Stacy, as a binary event, right? Once we get a facility up and running and committed to using and adopting YCANTH for our patients, we should be able to count on that repeat business month over month. You're welcome.

Thanks. I just want to better understand the state of play with coverage. And maybe as it relates to the new J-Code, you talked about dramatically expanding covered lives numbers, I think to over 200 for nearly doubling quarter-over-quarter. What does that really mean on the ground? And what does coverage versus - headline coverage versus pull-through at the office level, does the J-Code in April mean that it will be really easy for patients and physicians? Are there still prior authorizations potentially necessary and have their friction? And then I have follow-ups.

Oren, thanks for the question. As you know as we're ramping coverage up, we have over 200 million lives now, which is exceptional for a product this young in its life cycle. It's a medical benefit-driven product. So you typically see less prior authorizations than you would on the pharmacy benefit side, you will still have occasionally a prior authorization, which will the label just the doctor having to put in their notes, the patient was two years of age and older. But to your question now, we have a J-Code assigned that streamlines the reimbursement portion of it, and if your coverage is clean, i.e., no prior authorization. That's going to facilitate same-day treatment for that patient under that insurance company. If there's a prior authorization, they got to just get that cleared and treat. So they have got to submit the paperwork around it. But having both, having these 200 million lives and the J-Code now working in sync should really help accelerate the adoption of YCANTH even more.

And just timing there, so you mentioned it being published April 1st, I guess are there a couple of steps after that with regards to still getting that propagated through EMRs? Or is that how that happens automatically on April 1st? And then when that’s there, how much education effort is there still to makes offices aware that there has been a material change and their life has presumably gotten easier? And so maybe when should we see an acceleration through the year of sale?

Yeah. So just to point you back, we were awarded the J-Code in January. So we have started already working through a fully baked communication plan with the insurance community and letting them know that the J-Code was awarded and we're tracking now to see who is starting to publish it. Okay. So that's been going on since January. We're also working now to work with customers who are either currently buying down the miscellaneous J-Code or who have expressed interest in coming onboard to buy-and-bill, and the J-Code was final. And we're working to get those offices set up ahead of April 1. And then as we continue to track towards April 1, we got several more communication blasts going to the payer community. Post-April 1 we'll continue to do that, just to make sure we have our top 150 payers squared away. And it's always boots on the ground, right? So we have our sales team out there. And they're going to continue to make sure that the office is aware of the J-code itself, the J-code number, making sure that they have checked their insurance contracts to what their reimbursement will look like on the ASP plus side of it. And that's always a deal. This is an account management drug, right? There's always that reinforcement of education and knowledge that we share with customers every time we're in the office in addition to our clinical sites.

Okay. To follow up on an earlier question about how doctors are using it, what do we know so far about retreatment rates? I understand it’s early, but I’ve heard some patients have achieved clearance with one retreatment. What trends are you seeing as we consider how to model the average number of treatments per patient? Additionally, do you have any reason to believe that re-treatments will be handled differently by insurance?

No. Yeah. So let me take your last question first. We don't see any impact on insurance reimbursement is what you're asking on retreatment, right? When they approved our product, they knew it could be up to two applicators per treatment. And they knew it was for three treatments over 12 weeks. And we haven't seen any real hard cap on the end of four treatments of somebody did that three treatments let's say, right? So, no, we don't anticipate friction there from the Payer Community. Right now it's early. But what we're seeing is the typical two applicators per patient plus, we're also early on using samples there, right? Starter doses to get them going as we're building coverage. So the two plus two samples is a pretty good spot to be in and we're tracking towards, how we modeled our thoughts around driving demand. And what it would look like on a per-patient level as far as the applicator dose.

Okay. I'll get back in the queue if there is a question by me. Thanks.

Okay. Thank you.

Hi everyone. This is John on for Serge. Congrats on your progress. And thank you for taking our questions. So regarding the upcoming Type C meeting for YCANTH Label Expansion in common warts, would you be able to provide any color on the potential design of this trial and whether or not additional trials would be conducted in External Genital Warts and that's include, investment required and any potential market opportunity for each of these indications? And second, can you provide any insight on how your partnerships with Walgreens are structured and whether we'll see any additional Specialty Pharmacy partnerships in the future? Thanks.

So John thanks for the questions, but first I'll turn it over to Gary Goldenberg, our Chief Medical Officer.

Thanks Ted. For the Type C Meeting follow-up, regarding our common warts with the agency and I think the way that you could think about it, this is would be a typical Phase 3 program, that you would expect the agency to ask us to sponsor to run? We are still in communications and look forward to coming to us saying more as we continue to finalize the details of the trial design.

And then the second, I think the other two questions you had regarding Walgreens. So Walgreens, the partnership with Walgreens is accelerating nicely as it just to recall why we went to that, it gave us an opportunity to further expand our insurance network within the specialty pharmacy world, right? adding a second pharmacy. Walgreens also has 300 community health system stores, and we're working towards getting those stores stocked with YCANTH, and that will give us a presence across 50 states when that initiative is complete, and we're going to start doing that sometime later this quarter into the second quarter. And we're always looking at our model, right? So what we really want to do here is be operationally efficient, and we want to think about ways to continue to ramp acceleration. So your other question regarding potentially adding another specialty pharmacy, we'll continue to assess that and see if there's a need to further strengthen our footprint and help accelerate this. So that's constantly under review by us.

Great. Thank you and good morning. So two questions. First, what's the model for the pediatric sales force? I think I've seen it various times. We're going to have, I think, a part-time pediatric sales force, and then I think I've also seen that this may be evolved to where it's a, you know, these are full-time hires with probably a compensation model that looks like the dermatology team?

Yeah, so great question. You know, we were looking at a variety of models in pediatrics, knowing that we had to get there. But based on the inbound traffic, we continue to get to the office and what we're hearing on the ground, we made the decision to staff that with a full-time compensated field force. So, we'll be building that team out to 20 representatives, and they will be hitting the ground in full April 1st. We think there's a strong market opportunity with pediatricians, and we've decided to make that a full effort to go after it.

Okay. That's very helpful. And the second question relates to sampling and just when you look at the sell-through data from FFF, how much of that volume is sampling and how much of that so far is reimbursed business?

So when we look at sampling, that's on a, that's in a different lane for us, right? We're not looking at that as our pull-through from FFF. So sampling has just been on an as-needed basis, based on the opportunity with the physician. If they were looking to treat the same day while we were getting our insurance coverage built out or they're using the white bag specialty pharmacy, that has no bearing on what we're doing at FFF as far as our revenue drive.

Okay. But just looking at the overall activity, are we looking at 80%, 90% sampling at this stage or a lower number?

We typically see that the samples have been significantly decreasing since we launched the product in September-October. In September, we were probably at our highest level of trying to encourage trial use, and now we’re scaling that back. I would estimate that around 5% to 6% of our overall activity is currently driven by sampling.

The next question we have is a follow-up question from Oren Livnat of H.C. Wainwright. Please go ahead.

Thanks. To build on Kemp’s question, can you comment on gross-to-net? You mentioned Medicaid as an important part of the business. What is the situation with new specialty pharmacy networks, and how do you see that evolving now and in the future?

Good morning. Thanks, Oren. Gross-to-net to-date have been very consistent with our expectations prelaunch. So going forward, we continue to expect that net sales as a percentage of gross sales is going to be in that 45% to 50% range, but there might be some lumpiness in that number throughout the year just depending on where patients are in their deductibles, but very consistent with what we thought prelaunch.

And do you expect that to improve as coverage and contracting come down through the year? And what's the sort of terminal sustainable gross-to-net in mind?

Yes. We would expect that improved both as coverage comes on and we have less impact of our co-pay program for insured now covered as well as we transition more business to Buy & Bill, which is favorability from a distribution standpoint. So you're probably even closer to 50% the higher end of that range that I gave you once we get to a normal state.

Okay. And lastly, are you expecting significant response from the FDA in March to the Citizen Petition? How big a deal is this imported business now? And do you think they're going to just kick the can on this 180 day response? Are you expecting something material and what might be the next steps?

Yes, Oren. We don't expect them to kick the can. You know their response is due in April. We continue to have outreach with the FDA regarding our concerns and we fully expect to respond to them.

Right. But do you think they actually will take action or will they just acknowledge your concern and leave it at that?

Yes, If I knew that I'd win the lottery. We think we made a very strong argument in our citizen's petition there is precedent for what we're asking for and we hope that the FDA rules in our favor. But obviously I can't predict what they're going to do. But we're confident that we will be successful one way or the other.

There are no further questions at this time. I would like to turn the floor back over to Ted White for closing comments.

Thank you, operator. So I'd like to thank all of you for joining us this morning. We're obviously very pleased with the significant accomplishments in 2023 and the progress we expect to make in 2024. And we look forward to providing another update on our first quarter earnings call in May. Thank you very much.

That concludes today's conference. Thank you for joining us. You may now disconnect your lines.