Verrica Pharmaceuticals Inc

NASDAQ:VRCA

Earnings Call Analysis

Verrica’s YCANTH Gains Traction and Promises Growth

Verrica Pharmaceuticals reported second-quarter 2024 revenues of $5.2 million, driven by $4.9 million from YCANTH. YCANTH's strong performance was supported by its new distribution partner, Cencora, and favorable CMS reimbursement codes. Despite a net loss of $17.2 million, Verrica reduced research expenses while increasing commercial activities. They expanded pediatric sales, Medicaid coverage, and buy-and-bill accounts. With 234 million lives covered, operational hurdles have been addressed, allowing focus on market share and adoption. VP-315 showed promising results in treating basal cell carcinoma, demonstrating 51% clearance and 71% tumor reduction. Verrica remains confident in its pipeline and commercial strategies for long-term growth.

Strong Revenue Growth with YCANTH

In the second quarter of 2024, Verrica Pharmaceuticals reported total revenues of $5.2 million, driven largely by the sales of its lead product, YCANTH, which generated net revenues of $4.9 million. This growth was supported by a combination of increased demand and the introduction of a new specialty distributor, Cencora, which significantly contributed to revenue as it accounted for about 54% of YCANTH's sales in the quarter. The company anticipates that ongoing efforts targeting healthcare providers, particularly in hospitals and dermatology practices, will further enhance sales in the latter part of 2024.

High Margins and Controlled Costs

The gross product margins for YCANTH were impressive at 93% for Q2 2024, benefiting from efficient production processes and cost management strategies. Research and development expenses decreased by $2.4 million from the second quarter of 2023 to $3.3 million, primarily due to reduced clinical trial costs. However, selling, general, and administrative expenses increased by $10.6 million to $16.5 million, reflecting heightened commercial activities. Despite a GAAP net loss of $17.2 million (or $0.37 per share), the longer-term outlook for profitability appears favorable given the strong margins and reducing R&D costs.

Regulatory Progress and Market Positioning

Verrica made significant strides with regulatory approvals, including a permanent J-Code from CMS for YCANTH, effective April 1, 2024. This enhancement is expected to improve reimbursement processes, further fostering adoption among healthcare providers. As of July 2024, insurance companies covering approximately 98% of commercial lives with YCANTH coverage have published their payment limits, which should instill confidence in prescribers and encourage same-day treatments through established buy-and-bill accounts.

Strategic Focus on Market Share and New Indications

The company is keen on penetrating the market further by targeting the treatment of common warts, a significant opportunity given the lack of FDA-approved therapies for this condition. With approximately 22 million patients in the U.S. affected by common warts, Verrica expects strong demand growth. The collaboration with Torii Pharmaceuticals will split the costs for a pivotal Phase III trial aimed at this indication, with feedback from regulatory agencies expected in late 2024 and trial initiation projected for early 2025.

Pipeline Advancement: VP-315 for Basal Cell Carcinoma

Verrica is also advancing its pipeline product, VP-315, a potential first-in-class treatment for basal cell carcinoma (BCC). Preliminary efficacy data presented showed a 51% complete histologic clearance rate of BCC across treated lesions. Notably, among residual tumors, there was a 71% reduction in size, indicating strong therapeutic potential. As BCC is the most commonly diagnosed cancer in the U.S. (with about 3.6 million diagnoses annually), this positions VP-315 as a promising centerpiece in Verrica's future, pending further studies to establish its clinical viability.

Challenges and Competitive Landscape

Despite the optimistic outlook, Verrica faces challenges, including managing the transition from compounded cantharidin products as the market works through existing inventories. Approximately 24,000 vials from Dormer Laboratories are still circulated, which may temporarily impact the growth of YCANTH in the coming months. Additionally, the entrance of competitors into the molluscum treatment space may enhance market visibility but also indicates the need for Verrica to maintain its competitive edge through effective marketing and customer support.

Cash Position and Financial Outlook

As of June 30, 2024, Verrica reported cash and cash equivalents of $31.9 million, expected to fund operations into Q1 2025. While the company is not providing revenue guidance for the back half of 2024, it expresses an optimistic forecast of increasing demand for YCANTH, supported by established pricing structures from commercial plan reimbursements and strategic distributor partnerships. Long-term gross margins are anticipated to stabilize in the low 90s percentage range as cost-saving initiatives take effect.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Verrica Pharmaceuticals Second Quarter 2024 Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Please note today's call will be recorded. [Operator Instructions] It is now my pleasure to turn the call over to today's host, Kevin Gardner, Managing Director with LifeSci Partners. Please go ahead.

[Kevin Gardner]

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 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 equivalents. 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?

[Ted White, executive]

Thank you, Kevin, and good morning, everyone, and thank you for joining us for our 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 onetime stock in 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's pull-through demand in the second half of the year.

We believe that we've addressed many big operational hurdles. And in the back 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 a 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 health care service. 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 build, we continue to promote YCANTH's value proposition for specialty pharmacy customers as we look to maximize adoption across both channels. In a moment, Joe will talk more about our commercial strategy and specific efforts to build additional momentum in the commercialization of YCANTH.

We continue to make progress in removing products containing compounded cantharidin in the U.S. 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 U.S. 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 6-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 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. And with the prevalence of approximately 22 million patients in the U.S. alone and no FDA-approved therapies, common warts represents 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 cost of a global pivotal Phase III trial for YCANTH in common warts.

Torii will fund Verrica's portion of the cost as an offset to Torii's future payment obligations to Verrica based on regulatory milestones and sales of YCANTH for 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 III 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 III study remains subject to feedback from the U.S. FDA and Japan's Pharmaceuticals and Medical Device Agency on the proposed design of the Phase III trial. We expect to receive feedback from the FDA and the PMDA in Q4 of this year. And based on our current time line estimates, we anticipate initiating the Phase III 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. By the way of background, 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 nonsurgical alternative to surgery, including [indiscernible] 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 II 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 the treatment with VP-315 resulted in approximately 51% complete histologic clearance rate of basal cell carcinoma.

In addition, of the patients who had residual carcinoma, those residual tumors showed approximately 71% reduction in tumor size. Taken together, this represents approximately 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 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 [indiscernible] surgery.

No treatment-related serious adverse events were reported in the Phase II study, and most treatment-related adverse events were classified as mild to moderate as expected with injection site pain being the most common adverse event.

Based on these positive efficacy and safety data from the Phase II 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 II study and provide additional insight into physician use case.

I'll now turn the call over to Joe to review our commercial progress. Joe?

[Joe Bonaccorso, executive]

Thanks very much, Ted. As Ted mentioned earlier, in the second quarter, we saw a pull-through demand for YCANTH growth sequentially quarter-over-quarter. The increase in demand reflects an increase in units dispensed through a specialty pharmacy and a higher number of units sold to hospitals and buy and 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, and 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 GPO's Vizient for hospitals and IPN for dermatology practices.

The targeted conversion of physician practices that were former users of compounded cantharidin and 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 a number of new Medicaid states, including Michigan, Louisiana, Alabama and West Virginia.

With respect to total lives under coverage as of July 31, we have reached 234 million lives under coverage, which encompasses 139 health care plans, spanning 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 also very 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 be a barrier to patients being able to receive an approved treatment.

Finally, on our last call, I discussed the addition of 20 new pediatric reps in the major MSAs across the country. I am very pleased with the productivities of these new professionals to our sales force, 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 same day.

I'll now pass it to Terry to review our fourth quarter and year-end financial results. Terry?

[P. Terence Kohler, executive]

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 ex-factory shipments to FFF related to demand pull-through as well as a onetime impact of an initial stock-in 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 having 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 pre-approval YCANTH spend 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 noncash 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.

And 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 will now turn the call back over to Ted for closing remarks.

[Ted White, executive]

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. Significant amounts of compounded cantharidin have been removed from the U.S. market, and 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. We expect to continue advancing YCANTH for the treatment of common warts through our amended agreement with Torii and the exciting top line data we released today on our Phase II 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 noninvasive therapy that addresses 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.

[Operator]

Thank you. [Operator Instructions] Our first question will come from Stacy Ku with TD Cowen.

[Stacy Ku, analyst]

All right. We had a few questions. Just first on YCANTH. Can you put some metrics around the progress you've made in removing compounded cantharidin and just a better understanding around the time line of when things might resolve? Just help set some expectations there. And a quick follow-up on kind of the stocking you've discussed in a lot of detail. Where do you expect it to normalize versus where it is now? So those are our YCANTH questions.

And then for VP-315. Obviously, the treatment paradigm for BCC is -- has a lot of surgery. So kind of curious what's the pathway forward that could help build enthusiasm beyond the typical cutting out of the lesion? What are your early thoughts on study design? And what kind of follow-up do you think will be necessary to confirm long-term complete histological clearance? What do you think clinicians will want to see?

And then one more question, if possible, and I can come back and follow up. Do you see any greater success in certain lesions? Kind of curious about the success you've seen maybe on the face.

[Ted White, executive]

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 over to Gary Goldenberg for the VP-315.

So on 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 6 months. We know that in Dormer Laboratories, specifically, there were over 24,000 vials shipped to the United States. So we expect that, that inventory has to bleed out from offices.

And so when you think about it, the last shipment was made in April of 2024. So with a 6-month shelf life, we expect that to bleed out in the second half of the year. And I'll turn the next part over to Terry.

[P. Terence Kohler, executive]

Sure. Stacy. So 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. And so I think we expect inventory to normalize in the channel in the back half of the year and be normalized by early 2025.

[Stacy Ku, analyst]

Okay. Do you expect it to have some kind of expectations or guidance around the percentage of realized revenue? Kind of the inventory? Just to help set expectations?

[P. Terence Kohler, executive]

Yes. We'll certainly -- we know that distributors are going to take into account inventory on hand and future demand expectations as they think about what the appropriate level of ex-factory orders will be in the back half of the year, but we can't give any guidance on revenues at this stage or comment really on the cadence of any future ex-factory orders.

[Operator]

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

[P. Terence Kohler, executive]

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

[Gary Goldenberg, executive]

Yes. Can you hear me? Okay. So regarding the paradigm, we believe that based on our Phase II data -- and it's Phase II, not Phase III. But based on the Phase II data, we believe that this product, the VP-315 has the ability to shift the treatment paradigm. I think if you look at our favorable safety profile in the Phase II study, we're very pleased with that.

And as you know, Phase II really is a safety study. It's a dose escalation safety study. We did not see any severe adverse events related to the treatment. So that's a very positive development.

If you look at efficacy data for complete histologic clearance and also for tumor size reduction essentially shrinking the tumor, 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 vast majority of patients, you get a diagnosis with a biopsy. Your next step of surgery. We believe that VP-315 has the potential to be that step in between. In 51% of subjects in our study, it was complete histologic clearance, meaning that there would be no need for a surgical intervention. In those patients who did not have histologic clearance, there was a 71% reduction in lesion size.

What does that mean for a patient? It means that if they do have to have surgery later on, the surgery now is much smaller. It's decreased by more than 50%. So their surgical scar, the operation itself, is now much smaller than it would have been prior to using VP-315. So we really believe that this has potential to shift the treatment paradigm.

As far as the follow-up time needed and what dermatologists would like to see, I think it's too early to comment. I think these are the things that we will discuss with the agency in our end of Phase II meeting, which we anticipate to have it in the first half of next year.

But I think at this point, we are all very excited about the potential of this molecule to shift to the treatment paradigm for the 3.6 million plus patients with basal cell carcinoma in the United States alone.

[Operator]

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

[Gregory Renza, analyst]

Ted, congrats on the progress. 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 wanted to provide -- if you can just provide some of your commentary on the trajectory from here in light of all the execution detailing that you're doing?

[Ted White, executive]

Sure. Thank you, Greg, for the question. So listen, I would tell you a couple of things. Prior authorizations. We typically see that in our Medicaid, in our managed Medicaid, area of business, and we are actively working with those accounts as we speak to negotiate to get those PAs removed.

Difference between a medical benefit and a pharmacy benefit. In a medical benefit policy, you cannot treat the same day until you get the authorization code. So it's not like a pharmacy benefit where you can do an electronic prior authorization ("Cover my meds," et cetera). Medical benefit is different. So this is a key area that we're focusing on in order to get these PAs removed.

Again, we typically see it in managed Medicaid and state Medicaid and then also the Blue Cross Blue Shields of the world. So that's number one.

Number two is we're looking to pull a lever with our co-pay program. Right now, our co-pay program is -- there's a variance between $25 to $75. You'll be hearing shortly that we'll be streamlining that process and making it more simplistic for customers and for the patients. So that's another lever.

I also think that the other lever we have with IPN with Cencora, they have a strong footprint in dermatology, and now we'll be able to do contracting with them and be able to talk spread that, as you know, our field force cannot talk about with customers.

And then, of course, we have Vizient for the institutions. And then finally, looking at payers, why we have strong coverage. We'd like to get even stronger coverage and look to go to a dual benefit where we have a pharmacy benefit as well as a medical benefit. And those are the levers that we're actively working on as we speak.

[Gregory Renza, analyst]

That's great. And just one more maybe for Terry. Just on the sampling. Can you just give us a state of the contribution there and the expectations?

And then maybe I'll just lob in. As you see the demand and maybe some of that predictability, I know you didn't provide refraining from guidance on, of course, some inventory, but just largely, did you have a time line as to when you would feel comfortable just internally on projections to provide larger, longer-term guidance when it comes to YCANTH revenues? Congrats, guys, on the quarter and the data.

[P. Terence Kohler, executive]

So on the guidance front, that's something that we'll consider as we get closer to 2025. It's not something that we'll do in the back half of this year. And then on the sample program, so we continue to sample, but I would tell you the sampling has gone significantly down and will continue to go down, we believe, over the back half of the year.

Joe, is that --?

[Joe Bonaccorso, executive]

Yes. I mean we look at the sample program as trade doses because they are a starter dose, right, to help the patient. So we're -- that continues to go down as we're continuing to build our coverage and the same-day treatment for physicians. So to Terry's point, that's going to continue to taper down dramatically in the back half of the year here.

[Operator]

Our next question will come from Glen Santangelo with Jefferies.

[Glen Santangelo, analyst]

Ted, I mean, you commented multiple times, obviously, about the settlement against Dormer Labs, and that's obviously a major step forward. But can you say sort of confidently at this point, you're not really seeing any incremental compounded cantharidin sort of come in to the market at this point? Do you feel like that window has closed?

[Ted White, executive]

Glen, yes. So I could tell you, incrementally, no, we're not seeing any incremental compounded cantharidin in the market. Are there isolated cases where there's been compounded cantharidin seen? Yes, absolutely. And what I mean by that is that's the Dormer inventory that's bleeding out.

[Glen Santangelo, analyst]

Right. So I think what we're all trying to do is we're all trying to sort of reconcile maybe the $2.3 million in revenues you had this quarter with FFF, with the sort of the comments that you made in the press release that you expect prescription growth quarter-over-quarter in the back half? Sort of taking into consideration that it may take some time to bleed out the compounded cantharidin sort of in the market.

So you think we're starting to see that now. I mean we're midway through 3Q. I don't know if there's any sort of commentary you can give us sort of at this point, but maybe you feel like we're at the point where we're going to start to see that inflection in Scripps because the compounded cantharidin is sort of almost worked its way fully through the system. Is that kind of the message you're trying to send?

[Ted White, executive]

Absolutely. I mean we expect to see the inflection with the Dormer now bleeding out. We're already seeing, Glen, accounts that were on the Dormer target list. As you know, Dormer -- we know those accounts, and we're already seeing orders from those accounts starting to come in as those accounts bleed out their inventory.

[Glen Santangelo, analyst]

Perfect. And maybe my last question is sort of on Ligand's product. You're obviously aware that there is another company that got approval. I don't know if you could sort of comment on the competitive landscape, if there's anything else sort of you're paying attention to and how that approval might ultimately be impacting the market positively or negatively for you.

[Ted White, executive]

Yes, great question. We're fully aware of ZELSUVMI. And listen, I would tell you, we think it's great that somebody else recognize the opportunity within molluscum. And look, for us, I think it only helps Verrica because it's going to increase the share of voice around molluscum. Our customers know that cantharidin is the gold standard for the treatment of molluscum contagiosum.

So that -- again, we only see that as a benefit to us. Thank you, Glen.

[Operator]

Our next question will come from Oren Livnat with H.C. Wainwright.

[Oren Livnat, analyst]

Exciting time over there. I have a couple of 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 intrapatient?

And bigger picture, if you think about this product strategically, obviously, this is also medical dermatology, which overlaps with where you're at, but it's clearly a different market than the pediatric focus you have now. Presumably could be maximized by a larger company as well when you talk about [indiscernible] potential.

So going forward, do you think about trying to maybe partner this and focus on YCANTH? Or are you keeping all your options open, which I assume will be your answer? And then I have YCANTH follow-ups after that.

[Ted White, executive]

Sure, Oren. This is Ted. So absolutely, we want to keep all of our options open as it relates to 315, including partnerships. So -- and I'll turn the next part over to Gary to answer the other questions that you had.

[Gary Goldenberg, executive]

Thanks, Ted. So regarding the abscopal effect, it was one of the secondary endpoints in our protocol. At this point, we're not ready to comment regarding abscopal effect.

The only thing I can say is that we did have a few tumors where we did look for abscopal effect and just stay tuned for those data. The only things that we're able to discuss now are the safety and the preliminary top line results.

[Oren Livnat, analyst]

And just lastly, on 315. You mentioned in the press release you're excited to continue to explore these properties in tissue and blood samples, I think.

Does that indicate potentially trying to quickly broaden the potential indications that you might target learning more on that front? Or is this about needing to better characterize the product, maybe in the mechanism of action in the current BCC program?

And then on YCANTH, can you just talk about the forward deployed inventory model a little more, which I don't think you addressed recently.

How is that playing out in the field? When you look at orders, are physicians stocking essentially in the office to have some on the table if and when they want to actually pull the trigger and use it? How much of that versus just in time essentially ordering even in office, so they're just -- we can see what they're using. Do you have visibility with FFF on that front, how much of that's getting used?

[Gary Goldenberg, executive]

So I just want to address the tissue and the blood samples. So I think we're just looking at the basal cell subjects that we studied in our Phase II study at this point. And if you look at VP-315 as an immune modulator as an oncolytic peptide, it works by -- at least the proposed mechanism of action or the one that's been elucidated to this point -- is that it works by activating a local immune response to tumor-specific antigens.

So [indiscernible] tumor cells, you reveal those antigens, which are normally protected by the tumor and then you get an immune stimulation.

We want to study this further. We want to see exactly what kind of immune response we're getting in the tissue and whether or not we are getting one in the blood samples, which would give us a window to understanding of whether or not we're going to see a systemic response to basal cell antigens, which I think would be exciting. But at this point, it's just simply to characterize further the MOA and the immune response we're getting by injecting VP-315 into the tumors.

[Joe Bonaccorso, executive]

So regarding your question, the forward deployed inventory is still a part of our core model. That is an opportunity for physicians who would rather consign in the inventory, if you will, forward deploy it in and then get billed as they're treating patients.

We also like to keep our buy and bill model agile. We have some physicians that are more interested in volume tier discounts and often voice discounting as well. So we're seeing a blended approach on the buy and bill side.

And again, we try to keep our program agile enough to reflect the needs of the customer and what that particular customer is interested in.

[Oren Livnat, analyst]

All right, thanks. I'll follow-up after. I appreciate it.

[Operator]

Our next question will come from Serge Belanger with Needham.

[Serge Belanger, analyst]

A couple on YCANTH, to start off with. I guess going forward, should we expect any additional distributor or GPO partnerships? And maybe what the impact is on the overall net pricing as you continue expanding the GPO field here?

And then on VP-315, I guess for Gary, obviously, pretty exciting data in basal cell carcinoma. Do you feel this derisks the program for squamous cell carcinoma? And is that one of the other non-melanomas you expect to target going forward?

[P. Terence Kohler, executive]

It's Terry. I'll answer the first part around the pricing. So with the addition of Cencora, we still believe that our overall net sales as a percentage of gross sales is going to continue to be in that 45% to 50% range over time. We'll continue to evaluate that and monitor as we move forward, but that's still our expectation.

[Joe Bonaccorso, executive]

Yes. And Serge, for the second part about the possibility of activating our market further with distributors or opportunities. Look, I mean, we have to remain opportunistic as an organization. This is a big market, and we certainly are exploring ways to make sure we can reach the customers that need the product.

It could be through an expansion, perhaps of some degree with some regional pharmacies or we can look into further opportunities that might help in areas such as the Department of Defense and other customer segments that we're spending time in. So really, the message here is we'll look to be opportunistic and be mindful as we're building it out.

[Gary Goldenberg, executive]

Serge, regarding your question on SEC, just a reminder that we do have the global rights to develop VP-315 for basal cell carcinoma, squamous cell carcinoma and nonmetastatic melanoma and nonmetastatic Merkel cell carcinoma.

I think at this point, we're focused on basal cells since it is the most common malignancy in humans with over 3.6 million cases in the United States. But it doesn't mean that we wouldn't think about another opportunity like squamous cell, which is the second most common skin cancer in humans. It doesn't mean that we wouldn't think about that at some point.

But right now, I think our focus remains basal cell moving forward with an end of Phase II meeting sometime in the first half of next year, discussing a Phase III program with the agency and then hopefully moving forward into the Phase III program.

[Serge Belanger, analyst]

Great. Just a follow-up on YCANTH. Can you just talk about the mix of prescribers between derms and peds since you deployed your pediatric sales force? Maybe just comment on if you've seen any off-label use of the product to -- for some of the wart indications.

[Joe Bonaccorso, executive]

Yes, we can't support off-label use and our co-pay program doesn't cover for that. So we have no visibility into what's happening in the practice because we can't support it.

The second piece of it is the dermatologists, pediatric dermatologists hospital base, continue to be the major treaters of molluscum. But our pediatric team is making quick inroads here having just deployed in April.

What's been fascinating to us is not only the outreach and the interest from the pediatricians, but the willingness to take the product into their office on direct purchase because they'd like to treat patients same day and do it under the supervision of a health care professional.

[Operator]

Our last question will come from Kemp Dolliver with Brookline Capital Markets.

[Kemp Dolliver, analyst]

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

[P. Terence Kohler, executive]

Kemp, this is Terry. Yes, we would expect to see that start to happen in the second half of the year. But just as a reminder, over the long term, we still expect gross margins to be in that low 90s percentage.

Obviously, we have -- we're focused on continuing to drive cost down as we move forward. So there's a potential that we could see some of that benefit pull through in 2025. But too early to talk about that at this stage. So I think that low 90s is still a good place for us to be from a gross margin standpoint.

[Kemp Dolliver, analyst]

Great. And the second question is going back to the compounded shipments by Dormer and Lighters. Ted, I think you quoted a number. What was that number again?

[Ted White, executive]

Well, what we know is about 24,000 vials that have been shipped to the U.S. from Dormer Laboratories.

[Kemp Dolliver, analyst]

Okay. Great. And no visibility on what Lighters had been doing prior to your agreement with them?

[Ted White, executive]

No. Thank you.

[Operator]

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

[Ted White, executive]

Thank you, operator. I'd like to thank all of you for joining us this morning. We're obviously 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, and we look forward to providing another update on our third quarter earnings call in November. Thank you.

[Operator]

This does conclude the Verrica Pharmaceuticals Second Quarter 2024 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.