Verrica Pharmaceuticals Inc. Q2 FY2024 Earnings Call

Good morning, and welcome to the Verrica Pharmaceuticals Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. Please note today's call will be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the call over to today's host, Chris Calabrese from LifeSci Patterners. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Verrica Pharmaceuticals second quarter 2024 corporate update and earnings conference call. With me on the line this morning are Ted White, President and Chief Executive Officer of Verrica; 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 VP-102 for the treatment of molluscum contagiosum in the United States, regulatory developments, the development and potential benefits 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 the timing of events could differ materially from those anticipated in such forward-looking statements. Please see 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. I appreciate you joining us for the second quarter 2024 earnings call. I'm pleased to report that we continue to make progress across our business, including with the commercial launch of YCANTH and the exciting data being generated from our development stage pipeline. Starting with YCANTH, for the second quarter, we recorded product revenue net of $4.9 million, which reflects growth in demand for YCANTH as well as the expansion of our distribution footprint with the addition of Cencora as a specialty distribution partner and the related impact of a one-time stock and order. Cencora allows us to provide additional customer support through their GPO IPN, which is intended to target dermatologists and drive further buy-and-bill account growth through IPN's membership. We've also added Vizient as a GPO for hospitals, and we believe we will see a positive impact on YCANTH pull-through demand in the second half of the year. We believe that we've addressed many significant operational hurdles. In the second half of the year, we must focus on capturing market share and driving adoption. We continue to focus on simplifying the process for physicians to treat patients. On April 1, YCANTH received the permanent J-Code from CMS, and on July 1, CMS published the Part B schedule listing YCANTH reimbursement at an average selling price plus 6%. This created visibility for commercial insurers to further establish their own allowables, which represents the maximum amount a plan will pay for covered healthcare services. I'm pleased to report that as of today, insurance companies covering approximately 98% of commercial lives with YCANTH coverage have formally published their allowables, which is now visible to physicians electronically at the time of diagnosis. We believe that this should drive confidence in payer coverage and additional same-day treatment for established buy-and-bill accounts. In addition to driving growth in buy and bill, we continue to promote YCANTH's value proposition for specialty pharmacy customers, as we look to maximize adoption across both channels. We continue to make progress in removing products containing compounded cantharidin in the US. In July, we announced a litigation settlement with Dormer Laboratories that will discontinue the sale by Dormer of compounded cantharidin products in the United States. As the largest supplier of non-FDA approved cantharidin containing products into the US market, the settlement with Dormer marks a major win for patients who seek access to a safe, effective, and FDA-approved therapy for the treatment of molluscum. While we expect this sentiment will have a positive impact on demand for YCANTH, removing compounded cantharidin from the marketplace will take time, as compounded products typically have a six-month dating. We therefore remain focused on customer conversion, but we recognize it will take some time for Dormer's previously sold inventory to work its way through offices. While our main focus remains on developing the market opportunity for YCANTH for the treatment of molluscum, we think that's just the beginning for this unique and innovative product. The next major opportunity for YCANTH is for the treatment of common warts, which has a prevalence of approximately 22 million patients in the US alone and lacks FDA approved therapies, representing one of the largest unmet needs in all of dermatology. We continue to make important progress in advancing our common warts program. During the quarter, we amended our existing licensing agreement with Torii Pharmaceutical so that both companies will jointly conduct and split the costs of a global pivotal Phase 3 trial for YCANTH in common warts. Torii will fund Verrica's portion of the costs as an offset to Torii's future payment obligations to Verrica, based on regulatory milestones and sales of YCANTH from molluscum contagiosum and common warts in Japan. In addition, Torii will make a milestone payment of $8 million to Verrica upon the first patient dosed in Japan in the Phase 3 trial. Importantly, this amendment should benefit both parties from a cost and time to market standpoint, and the new funding structure is expected to have minimal impact on our near-term cash position. Initiation of a global Phase 3 study remains subject to feedback from the US FDA and Japan's Pharmaceuticals and Medical Device Agency on the proposed design of the Phase 3 trial. We expect to receive feedback from the FDA and the PMDA in Q4 of this year. Based on our current timeline estimates, we anticipate initiating the Phase 3 trial in the first half of 2025. If YCANTH is successfully developed, approved, and commercialized for the treatment of common warts, we anticipate a high degree of call point overlap and marketing synergies with our current molluscum promotion of YCANTH. Now, I'd like to briefly review the exciting data we announced this morning for our lead pipeline candidate, VP-315, which is being developed for the treatment of basal cell carcinoma. VP-315 is a potential first-in-class oncolytic peptide that has been engineered to provide more targeted delivery to stimulate the patient's immune system and destroy cancer cells. We are developing VP-315 as a therapy that can serve as a potential non-surgical alternative to surgery, including Mohs surgery, or as a neoadjuvant chemotherapeutic for basal cell carcinomas, including advanced basal cell. As the most common type of cancer globally, we expect that the commercial opportunity for basal cell carcinoma is sizable, with approximately 3.6 million diagnoses each year in the United States alone. The Phase 2 study is an open-label proof-of-concept trial designed to assess the safety and tolerability, dose regimen, and efficacy of VP-315 in biopsy-confirmed basal cell carcinoma. Preliminary efficacy data based on 90 out of 93 lesions treated show that treatment with VP-315 resulted in approximately a 51% complete histologic clearance rate of basal cell carcinoma. In addition, of the patients who had residual carcinoma, those residual tumors showed approximately a 71% reduction in tumor size. Taken together, this represents approximately an 86% overall reduction in tumor size across all lesions treated. These results, if confirmed in a pivotal study, make a strong argument for the use of VP-315 as a first-line therapy in the treatment of local and advanced basal cell carcinoma, which will either eliminate the need for additional treatment entirely or significantly reduce the size of the excision and the surgical burden associated with other treatment regimens, including Mohs surgery. No treatment-related serious adverse events were reported in the Phase 2 study, and most treatment-related adverse events were classified as mild to moderate, with injection site pain being the most common adverse event. Based on these positive efficacy and safety data from the Phase 2 trial, we believe VP-315 has significant potential to become an important first-line treatment option for basal cell carcinoma, for use prior to surgery, or instead of oral therapies which have significant systemic side effects. We are obviously very pleased with these clinical data and we intend to hold a KOL event in the near future to discuss in more detail the results from the VP-315 Phase 2 study and provide additional insight into physician use cases. I'll now turn the call over to Joe to review our commercial progress. Joe?

Thanks very much, Ted. As Ted mentioned earlier, in the second quarter we saw pull-through demand for YCANTH grow sequentially quarter-over-quarter. The increase in demand reflects an increase in unit suspense through a specialty pharmacy and a higher number of units sold to hospitals and buying bill offices, including Walgreens community stores. Although YCANTH showed growth versus the prior quarter, we remain focused on accelerating growth in the second half of the year. We believe that many of our accomplishments from the second quarter, including our settlement with Dormer Labs, the receipt of a permanent J-Code from CMS, and the establishment of allowables across the commercial coverage will translate into increased demand for YCANTH in the second half of 2024 and beyond. In the third quarter, we are working aggressively to grow applicator demand by focusing on the expansion of our buy-and-bill accounts, which includes the addition of GPOs Vizient for hospitals and IPN for dermatology practices. The targeted conversion of physician practices that were former users of compounded cantharidin is also a major part of our strategy, along with placing an emphasis on driving adherence through treat-to-clear messaging and medical education. Our coverage footprint also continues to expand and in the second quarter we added several new Medicaid states, including Michigan, Louisiana, Alabama, and West Virginia. As of July 31, we have reached 234 million lives under coverage, which encompasses 139 healthcare plans covering commercial, Medicaid, Tricare, and Federal employee plans. With the permanent J-Code in place and allowables established on most commercial plans, we believe broader acceptance by prescribers will continue as the reimbursement process becomes more efficient. We're focused on optimizing coverage under the commercial and state Medicaid plans by working with the payer universe to eliminate prior authorizations and other administrative burdens that may potentially hinder patients from receiving an approved treatment. Lastly, on our last call, I discussed the addition of 20 new pediatric reps in major MSAs across the country. I am very pleased with the productivity of these new professionals in our salesforce, which we believe is driving increased awareness and utilization of YCANTH in major pediatric medical practices. Pediatricians are also showing interest in buy-and-bill as they prefer to control the patient journey and have the ability to treat on the same day. I'll now pass it to Terry to review our fourth quarter and year-end financial results. Terry?

Thanks, Joe. For the second quarter of 2024, we reported total revenues of $5.2 million, which included YCANTH net revenues of $4.9 million. YCANTH's revenue reflects a combination of X factory shipments to FFF related to demand pull-through, as well as a one-time impact of an initial stock and order from our new specialty distributor Cencora, which represented approximately 54% of YCANTH revenue in the quarter. Gross product margins for the second quarter of 2024 were 93%, which continued to benefit from certain components of standard cost of goods sold, including bulk production and the assembly of applicators from our registration batches which had been expensed as R&D prior to approval. Research and development expenses of $3.3 million in the second quarter of 2024 decreased versus the second quarter of 2023 by $2.4 million, driven primarily by a reduction in clinical trial costs related to VP-315 and CMC costs related to preapproval YCANTH spending in the prior year period. Selling, general, and administrative expenses of $16.5 million in the second quarter of 2024 increased versus the second quarter of 2023 by $10.6 million, driven primarily by commercial activity for YCANTH. GAAP net loss was $17.2 million, or $0.37 per share for fiscal second quarter 2024, compared to a GAAP net loss of $11 million, or $0.24 per share for the prior year period. On a non-GAAP basis, which excludes stock-based compensation and non-cash interest expense, the second quarter of 2024 net loss was $14.4 million, or $0.31 per share, compared to a net loss of $9.4 million, or $0.21 per share for the second quarter of 2023. Finally, as of June 30, 2024, Verrica had aggregate cash and cash equivalents of $31.9 million. The company expects that its cash and cash equivalents as of June 30, 2024 will be sufficient to fund operations into the first quarter of 2025. I'll now turn the call back over to Ted for closing remarks.

Thanks, Terry. As we progress through the third quarter, we are laser-focused on the launch of YCANTH and accelerating YCANTH demand in the second half of the year. We achieved important wins across multiple areas of our business, with significant amounts of compounded cantharidin removed from the US market. We will continue to be vigilant on this front. CMS published favorable YCANTH allowables on July 1, and we continue to focus on expanding our buy-and-bill accounts and demand with the addition of Cencora, IPN, and Vizient as GPOs, targeting physician groups and hospitals. We also made considerable progress in our pipeline and expect to continue advancing YCANTH for the treatment of common warts through our amended agreement with Torii, and with the exciting top-line data we released today on our Phase 2 data for VP-315 for the treatment of basal cell carcinoma. Our company remains very excited about VP-315's unique and differentiated product profile, which has the potential to be a primary and neoadjuvant non-invasive therapy addressing a significant unmet medical need in dermatology. That concludes our formal remarks, and I'll now turn the call over to the operator for Q&A.

Thank you. The floor is now open for your questions. Our first question will come from Stacy Ku with TD Cowen. Please go ahead.

Good morning. We have a few questions. First, regarding YCANTH, could you provide some metrics on your progress in removing compounded cantharidin? I would also like to understand the timeline for resolution to set expectations. Additionally, could you elaborate on the stocking situation you discussed previously? Where do you expect it to normalize compared to its current state? Now, for VP-315, given that the treatment approach for basal cell carcinoma often involves surgery, I'm interested in the pathway forward to create excitement beyond just excising the lesion. What are your initial thoughts on study design, and what type of follow-up do you believe will be needed to confirm long-term complete histological clearance? What do you think clinicians will be looking for? Lastly, if possible, I have one more question to follow up on later. Do you notice any improved success in treating certain lesions? I am particularly interested in the results you've seen, perhaps on facial lesions. Thank you.

Thank you, Stacy. This is Ted. I'll handle the first part on the compounded cantharidin and then turn it over to Terry and then to Gary Goldenberg for the VP-315. Regarding the compounded cantharidin, as you know, we've announced that we've been successful with both Lighters and Dormer Laboratories. Typical compounded cantharidin has a shelf life of around six months. We know that Dormer Laboratories specifically shipped over 24,000 vials to the United States. We expect that inventory to bleed out from offices. The last shipment was made in April of 2024. With a six-month shelf life, we expect that to clear up in the second half of the year. I'll turn the next part over to Terry.

Sure. Good morning, Stacy. In your question on inventory and normalization, I think our expectation is that we're going to continue to grow demand aggressively over the back half of the year here. We expect inventory to normalize in the channel in the back half of the year and to be normalized by early 2025.

Okay. Do you expect to provide guidance around the percentage of realized revenue, kind of the inventory, just to help set expectations?

Yeah. Well, certainly, we know distributors are going to take into account inventory on hand and future demand expectations as they consider the appropriate level of X factory orders for the back half of the year. However, we can't give any guidance on revenues at this stage or comment on the cadence of any future X factory orders.

Okay. Understood.

Thank you. Our next question will come from Gregory Renza with RBC Capital Markets.

Todd, hold on a second.

Just as a pause, I want to make sure we answer the 315 question as well.

Yes, can you hear me? Stacy? Thank you for the questions. Regarding the treatment paradigm, we believe that based on our Phase 2 data, VP-315 has the ability to shift the treatment paradigm. By looking at our favorable safety profile in the Phase 2 study, we're pleased with that. Phase 2 really is a safety study. It's a dose escalation safety study. We did not see any severe adverse events related to the treatment, which is a very positive development. If you look at the efficacy data for complete histologic clearance and for tumor size reduction, we believe that VP-315 has the potential to be the treatment of choice between biopsy and diagnosis and potential need for surgery. Right now, in the vast majority of patients, you receive a diagnosis with a biopsy, and the next step is surgery. We believe that VP-315 has the potential to be that step in between. In 51% of subjects in our study, there was complete histologic clearance, meaning that there would be no need for a surgical intervention. In those patients who did not achieve histologic clearance, there was a 71% reduction in lesion size. This means that if patients do need surgery later on, the surgery will be much smaller, decreasing by more than 50%. Their surgical scar will now be much smaller than it would have been prior to using VP-315. We strongly believe that this could shift the treatment paradigms. As for follow-up needed and what dermatologists would like to see, it's too early to comment. We will discuss this further with the agency in our end of Phase 2 meeting, which we anticipate in the first half of next year. But we are all very excited about the potential of this molecule to shift the treatment paradigm for the 3.6 million-plus patients with basal cell carcinoma in the United States alone.

Thank you. We'll now go to our next question from Gregory Renza with RBC Capital Markets.

Great. Thanks. Good morning, Ted. Congrats on the progress. Thanks for taking my question, Ted, as you and Joe and the team talk about really accelerating and doubling down on execution for YCANTH in the market, just wanted to ask if you could just add additional color on some of those levers that you're pulling. How are you prioritizing the detailing there? I know you provided some comments in your prepared remarks. Just curious, how important is that same-day treatment and lowering those barriers for prior authorizations? I know you've seen that come down. And as we're about a year or so into launch, just provide some of your commentary on the trajectory from here in light of all the execution detailing that you're doing. Thanks.

Sure. Thank you, Greg, for the question. I would tell you a couple of things. Prior authorizations, we typically see that in our Medicaid and our managed Medicaid area of business, and we are actively working with those accounts to negotiate the removal of those PAs. The difference between a medical benefit and a pharmacy benefit is critical; under a medical benefit policy, you cannot treat the same day until you receive the authorization code. This is not like a pharmacy benefit, where you can do an electronic prior authorization. Therefore, this is a key area that we’re focusing on to eliminate these PAs. We typically see it in managed Medicaid and state Medicaid, as well as with some commercial plans. Additionally, we are leveraging our co-pay program. Right now, there's a variance between $25 and $75, and shortly you will hear that we will be streamlining that process to make it more simplistic for customers and patients. I also think another lever we have with IPN with Cencora is significant, as they have a strong footprint in dermatology. Now we will be able to do contracting with them and reach customers that our field force cannot discuss directly. And finally, looking at payers, while we have strong coverage, we hope to make it even stronger and pursue a dual benefit to include both pharmacy and medical benefits. These are the levers we are actively pursuing.

That's great. Thank you. And just one more maybe for Terry. Just on the sampling, can you provide us a state of the contribution there and the expectations? And also, do you have a timeline for when you would feel comfortable providing larger, longer-term guidance on YCANTH revenues?

Thanks, Greg. Good morning. Regarding guidance, we will consider that as we get closer to 2025; it’s not something we'll do in the back half of this year. On the sampling front, we're continuing to sample, but the volume is decreasing and we believe this trend will continue through the second half of the year.

We view the sample program as trade doses that are essentially starter doses to help patients. As we build our coverage and same-day treatment for physicians, it's anticipated that this will taper off significantly in the back half of this year.

Great. Thanks, guys.

Thank you. Our next question comes from Glen Santangelo with Jefferies. Please go ahead.

Thanks for taking my questions. Hey, Ted, you commented multiple times about the settlement against Dormer Labs, and that's obviously a major step forward. Can you say confidently at this point that you’re not really seeing any incremental compounded cantharidin coming into the market? Do you feel like that window has closed?

Hi, Glen. Yes, I can confirm that incrementally we are not seeing any additional compounded cantharidin in the market. Are there isolated cases where compounded cantharidin has been observed? Yes, absolutely, but that would be part of Dormer’s existing inventory.

Right. So, what we're all trying to reconcile is the $2.3 million in revenues you had this quarter with your earlier comments indicating that you expect prescription growth quarter over quarter in the back half of the year. Taking into account the time it may take for the compounded cantharidin to clear out. Do you think we're starting to see that inflection now? We are halfway through Q3, and I don't know if there's any comment you can provide on that front.

Absolutely. We expect to see the inflection with Dormer’s inventory now purging. We are already noticing accounts on the Dormer target list beginning to place orders as those offices deplete their stock.

Great. My last question is sort of related to Legend's product. You're aware that another company got approval; could you comment on the competitive landscape? Is there anything else you're monitoring, and how might that approval impact the market for you?

Yes, great question. We're fully aware of the evolving landscape. We think it's beneficial that others recognize the opportunity within molluscum. Our belief is that it will only help Verrica, as it will enhance the visibility around the molluscum contagiosum condition. Our customers regard cantharidin as the gold standard for treating this condition, and we only see it as a positive for us.

Thank you. Our next question comes from Oren Livnat with H.C. Wainwright. Please go ahead.

Let me unmute first. Thank you. Pretty exciting time over there. I have a couple questions on 315 and YCANTH, if I may. Just firstly, I'm really curious if you saw shrinkage in any tumors that weren't directly treated with 315. Essentially, I'm wondering if you saw a systemic immunological response and was there any control against matched tumors intra-patient? Moreover, bigger picture, regarding VP-315, this pertains to medical dermatology, which overlaps with your current focus. Clearly, it could be maximized by a larger company as well when discussing multi-blockbuster potential. Are you considering a partnership here while concentrating on YCANTH, or will you keep all options open?

Absolutely, Oren. We want to keep all of our options open regarding 315, including potential partnerships. I’ll turn it over to Gary for further insights on the specifics.

Thanks, Ted. Oren, hi. Thanks for the question. Regarding the abscopal effect, which we've identified as one of our secondary endpoints in the protocol, we aren’t ready to discuss that in detail at this point. We have had a few tumors where we examined the abscopal effect, and we’ll be able to announce those data in the future. Currently, we're only disclosing safety and preliminary top-line results.

And lastly on 315, you noted in the press release the intention to continue exploring properties in tissue and blood samples. Does that indicate a potential broadening of indications, or is it more about better characterizing the product and understanding the mechanism of action in the current BCC program? Also on YCANTH, could you elaborate on the forward-deployed inventory model, which wasn't addressed recently? Are physicians essentially stocking the office to have products on hand when needed, or are they more interested in just-in-time ordering?

To address your first question, we are solely assessing the basal cell subjects in our Phase 2 study, focusing on characterizing the immune response we’re getting when injecting VP-315 into tumors and whether this creates a systemic effect. This approach is imperative to clarify our understanding of the mechanism of action and its implications for broader applications.

Regarding forward-deployed inventory, it remains a key aspect of our core model. Physicians utilize it to manage inventory efficiently and facilitate patient treatment. We’re observing a blended approach on the buy-and-bill side; we adapt to what best suits customer needs.

All right, thanks. I’ll follow up afterward. Appreciate it.

You're welcome.

Thank you. Our next question comes from Serge Belanger with Needham. Please go ahead.

Hi. Good morning. Thanks for taking your questions. A couple on YCANTH to start off with. Should we expect any additional distributor or GPO partnerships? What is the impact on overall net pricing as you continue expanding the GPO field? On VP-315, do you consider the data supportive of moving ahead for squamous cell carcinoma, and is that one of the non-melanomas you expect to target going forward?

Hi, Serge, good morning. Regarding pricing, with the inclusion of Cencora, we still believe our gross-to-net sales will remain in the 45% to 50% range over time. We’ll continue monitoring that as we progress.

Serge, regarding possible partnerships or distributors, we must remain opportunistic. This market offers plenty of prospects, and we are exploring ways to reach customers effectively. This may include distributor expansion or venturing into new customer segments.

Just a reminder, we hold the global rights to develop VP-315 for basal cell carcinoma, squamous cell carcinoma, non-metastatic melanoma, and non-metastatic Merkel cell carcinoma. While we're focused on basal cell carcinoma presently, we are open to discussing squamous cell carcinoma in the future. Our immediate focus is to solidify our Phase 2 study results and prepare for an end-of-Phase 2 meeting in the first half of next year to discuss our Phase 3 program.

Great. Can you comment on the mix of prescribers between dermatologists and pediatricians since you deployed your pediatric salesforce? Have you observed any off-label usage of the product?

We cannot support off-label usage, as specified, and our copay program doesn't cover that. We cannot access visibility into this area. However, dermatologists and pediatric dermatologists continue to be our primary prescribers of molluscum, while our pediatric team is making rapid progress since their deployment in April. We are finding considerable interest from pediatricians willing to keep the product in their offices for same-day treatment.

Thank you. Our last question comes from Kemp Dolliver with Brookline Capital Markets. Please go ahead.

Great. Thank you. Two brief questions on YCANTH. First, you previously expected gross margin to start to normalize at a lower level around this time, which hasn't yet occurred. What are your thoughts on that? Has this been pushed into 2025, or will we start to see improvement in the second half of the year?

Morning, Kemp. Yes, we anticipate seeing these improvements in the second half of the year. However, long-term, we still expect gross margins to be in the low 90s percentage. We remain focused on driving costs down as we proceed, potentially realizing benefits into 2025.

Great, thank you. Regarding compounded shipments by Dormer and Lighters, what was that number again?

About 24,000 vials have been shipped to the US from Dormer Laboratories.

Okay, great. And no visibility on what Lighters conducted prior to your agreement with them?

No. Thank you.

Thank you. That concludes our question-and-answer session. I will now turn the call back over to Ted White for closing remarks.

Thank you, operator. I'd like to thank everyone for joining us this morning. We are very pleased with the significant accomplishments in the second quarter of 2024, including today's announcement on the positive top-line results of 315 for basal cell carcinoma. We look forward to providing another update on our third-quarter earnings call in November. Thank you.

Thank you. This concludes the Verrica Pharmaceuticals second quarter 2024 earnings conference call. You may disconnect your lines at this time, and have a wonderful day.