Verrica Pharmaceuticals Inc

NASDAQ:VRCA

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

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

[Kevin Gardner, executive]

Thank you, operator. Hello, everyone, and welcome to Verrica Pharmaceuticals Third Quarter 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 commercialization of YCANTH in the United States, Verrica's clinical development programs and product candidates, 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 third quarter 2023 Corporate Update and Earnings Conference Call. I'd like to begin today's call by providing a general update on the progress we've made since the second quarter. I'll then turn the call over to our Chief Commercial Officer, Joe Bonaccorso, who will provide a more detailed review of our commercial activities and launch of YCANTH in the United States. Following Joe's remarks, our Chief Financial Officer, Terry Kohler will review our third quarter financial results. We'll then open up the call to take your questions.The third quarter of 2023 proved to be a momentous period for our company. In July, the FDA approved YCANTH for the treatment of molluscum contagiosum or molluscum in adult and pediatric patients 2 years of age and older. The first ever FDA-approved product aimed at treating the 6 million patients in the U.S. who suffer from this highly contagious viral skin infection. We are very pleased with the high awareness and initial reception of YCANTH. Physicians and their patients who suffer from molluscum have waited a long time to have a safe and effective FDA-approved therapy to treat this disease. Based on the feedback we've received to date, we are confident in YCANTH's ability to address this disease, including that the design of the applicator itself allows for precise administration to each lesion.In addition to the positive reception and feedback we've been receiving for YCANTH, our distribution model is well received by the dermatologists and pediatric communities. As a reminder, physicians can obtain YCANTH in 2 primary ways. The first is a white bag service with our specialty pharmacy partner, Nufactor. The second is on buy-and-bill basis directly through our distributor partner, FFF Enterprise. We believe our buy-and-bill model is resonating well with health care providers, and we believe it will be a driver of future demand. As a reminder, under our buy-and-bill model, YCANTH is currently reimbursed under a miscellaneous J-code, which is expected to be replaced by an assigned permanent J-code by January 2024, which should be published by April 2024.We were just granted a C-code, which is used by hospitals and clinics on a temporary basis until our J-code is assigned. We expect that physicians who select to use our buy-and-bill distribution model will typically realize a 6% to 10% margin on ASP, which would not be available utilizing a specialty pharmacy in a white bag service. Our launch activities for YCANTH are supported by a favorable balance sheet, enabling us to execute our commercialization activities. Soon after receiving FDA approval for YCANTH, we announced a non-dilutive financing that extended our estimated cash runway into the first quarter of 2025. At this time, we believe we have sufficient capital to support the YCANTH launch and the continued advancement through Phase II of VP-315, our novel oncolytic peptide being studied for the treatment of basal cell carcinoma. I'll provide a brief on this program in just a minute.On August 21, we held our YCANTH national launch meeting to prepare for the launch of YCANTH. By the end of September, all 60 sales representatives were deployed into the field, and we're actively calling on their targets among over 8,500 health care providers identified in our launch strategy. In August, we received our first sale of YCANTH to our exclusive distributor FFF Enterprises, which resulted in net YCANTH product revenues of $2.8 million in the third quarter. In a few minutes, Joe Bonaccorso will share some details with respect to our marketing and reimbursement strategies to support the launch of YCANTH.While we're obviously excited by the reception for YCANTH, we're also mindful that health care professionals continue to use unapproved cantharidin-based products in some markets remain a challenge. Our efforts to clear the market of those unapproved drugs continue to proceed through the FDA and other available venues. To be clear, we believe that both federal and state law and regulations require, among other things, health care providers to have a valid prescription and a medical reason for prescribing a compounded product instead of prescribing our FDA-approved product. Moreover, we believe that there is a violation of federal and state law and regulations for pharmacies and health care providers to order compounded cantharidin as office stock for use on more than the single patient for whom they write a valid prescription as well as procure product from unauthorized trading partners in violation of the DSCSA.In August, we also issued a statement in support of the FDA's recent action against certain retailers, including Amazon and Walmart and manufacturers that warn consumers not to use unapproved products for the treatment of molluscum. We applaud the FDA's decisive actions to safeguard the public against these unapproved products, which supports the view that molluscum is a serious and prevalent health problem that requires medical intervention with therapies that have been rigorously tested and reviewed by regulatory authorities. As a reminder, YCANTH's approval was based upon positive data from 2 well-controlled Phase III trials demonstrating the clinical safety and efficacy of YCANTH, so that millions of people, primarily children who suffer from this viral infection can finally receive a safe, effective FDA-approved treatment for their condition.To further underscore our commitment to patient health, in September, we filed an import alert to halt the illegal importation of compounded cantharidin from Canada into the United States. In October, we filed a citizen's petition to, among other things, removed cantharidin from both the 503A and the 503 bulk substance list. We are also requesting that the FDA utilized its enforcement discretion to clear the market of all unapproved cantharidin drugs that issue warning letters to those entities who are in violation of the applicable laws and regulations.And finally, we are investigating private right of action claims against individuals and entities who are violating the law. We also remain quite active on the educational front. On October 11, we held a virtual KOL event for investors to discuss the approval of YCANTH, which featured Dr. Mark Kaufmann from Advanced Dermatology in Miami; Dr. Michael Cameron of Cameron Dermatology in New York City and also the Department of Dermatology at Mount Sinai; and Dr. Mercedes Gonzalez, pediatric dermatologist from the Dermatology of Miami. This event was well attended and attracted a broad array of institutional investors.Finally, I'd like to provide a brief update on VP-315, our novel oncolytic peptide, which is being developed for the treatment of basal cell carcinoma or BCC. In August, we announced the presentation of lesion clearance data from Part 1 of our ongoing Phase II trial. These data highlighted the antitumor response of VP-315 as determined by clinical and histological clearance of treatment basal cell carcinoma lesions. Dr. Neal Bhatia, Director of Clinical Dermatology Therapeutics, a clinical research in San Diego and principal investigator for the study, presented the data at the 2023 American Academy of Dermatology Innovation Academy.Based on the early but encouraging results from Part 1, we recently expanded Part 2 of the ongoing trial. VP-315 continues to show potential to be a nonsurgical, noninvasive therapeutic approach for the treatment of basal cell carcinoma, and we look forward to providing another update on this program in the first half of 2024.I'd now like to turn the call over to Joe Bonaccorso, who will review our commercial activities and the YCANTH launch. Joe?

[Joe Bonaccorso, executive]

Thanks very much, Ted. As Ted mentioned earlier, our commercial team is fully in place, and we're starting to see the effects of our initial outreach in the market with growing interest in prescribing YCANTH amongst physicians and broad acceptance on the payer side. In just 2 months since commercial launch, we have amassed over 112 million lives covered on both commercial and managed Medicaid plans, including Anthem, CVS Caremark and several Blues plants like Horizon, Empire, New Jersey, Georgia and Louisiana. In addition, we have already received state Medicaid fee-for-service coverage in New Jersey, Connecticut, Nevada and Arkansas.Looking out 6 months from now, we estimate the number of lives on their coverage will grow to approximately $140 million. As we mentioned in our July approval call, product sampling is a very important tool for our commercial activities at this early phase of our launch as we continue to grow reimbursement coverage. We continue to believe this strategy will drive adoption of YCANTH among health care providers. Our co-pay program is also working effectively. And through September, more than 85% of our patients pay $25 or less out of pocket based on our co-pay support program.To date, we have also gained formulary acceptance at over a dozen key institutions, including Akron's Children's Hospital, Mount Sinai, [ MUCS ], University of Miami, Stanford Lucille Packard's Children's Hospital, Event Orlando Children's Hospital, Memphis Children's Hospital and Northwell Hospital. In addition, we have several other institutions utilizing new factory as a bridge as they contemplate their formulary process, such as Yale, UPMC, Montefiore, Temple, Dell's Children's.During the fourth quarter, we anticipate several wins at key institutions, including Lurie's Children's Hospital, Texas Children's Hospital and UCSF. We currently have over 3,000 trained health care professionals and 1,300 offices sampled. We were also very active at major conferences this quarter, including the full clinical dermatology conference and the American Academy of Pediatrics National Conference, where we conducted product trainings and education programs. Finally, as Ted noted earlier, we expect to receive a final J-code for YCANTH in January of 2024, which is expected to benefit the establishment of buy-and-bill accounts.I'll now pass it to Terry to review our third quarter financial results.

[P. Terence Kohler, executive]

Thanks, Joe. YCANTH's revenues were $2.8 million in the third quarter of 2023, driven by the initial order from our sole distributor, FFF Enterprises. We also recognized collaboration revenues of $125,000 in the third quarter of 2023 related to the clinical supply agreement with Torii Pharmaceuticals. Those collaboration revenues related to clinical supplies and development support for Torii's Phase III clinical trial for molluscum contagiosum in Japan.Consistent with new product launches towards the end of the quarter, revenue of YCANTH in the third quarter of 2023, primarily reflects inventory stocking at FFF. While the company expects additional orders from FFF in the fourth quarter of 2023, these orders may be less than those received in the third quarter of 2023, as we continue to build awareness and pull-through demand among health care providers and patients in our first full quarter of commercialization. We expect inventory levels at FFF to normalize in the first half of 2024 as demand continues to grow.Gross margins for YCANTH were 95% for the third quarter of 2023, which benefited from certain components of standard cost of goods sold, including bulk production and the applicator assembly of our registration batches having them expensed as R&D prior to approval. Research and development expenses were $6.5 million in the third quarter of 2023 compared to $2.8 million in the same period of 2022. The increase of $3.7 million was primarily attributable to increased clinical costs driven by an increase in enrollment of patients in our Part 2 of our Phase II program studying VP-315 for the treatment of basal cell carcinoma.Selling, general and administrative expenses were $20 million in the third quarter of 2023, compared to $3.9 million in the same period of 2022. The increase of $16.1 million was primarily driven by the launch of YCANTH in the quarter and the onboarding of the sales force and commercial support functions. For the third quarter of 2023, net loss on a GAAP basis was $24.8 million or $0.54 per share compared to net income of $83,000 or $0.00 per share in the same period in 2022. As a reminder, the earnings per share in 2022 included the impact of the $8 million Torii milestone payment related to the start of their Phase III clinical program for molluscum in Japan.For the third quarter of 2023, non-GAAP net loss, which is calculated by adding back stock-based compensation and noncash interest expense was $14.8 million or $0.32 per share compared to a non-GAAP net gain of $2.9 million or $0.07 per share for the same period in 2022. And finally, as of September 30, 2023, Verrica had aggregate cash and cash equivalents of $84.3 million, and the company continues to believe its cash and cash equivalents 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 you can see, we believe that we're off to a positive start. The awareness of YCANTH is high and YCANTH is being well received. As the only FDA-approved therapy for the treatment of molluscum, we expect to see continued growing demand throughout the fourth quarter and in 2024. Our commercial team is in place, fully operational and has made significant inroads to bring this important new therapy to dermatologists and pediatricians. As always, we are in very close alignment with the FDA to help to remove any unapproved products from the market. In parallel with our commercial activities, we also continue to make significant progress with our lead pipeline asset, VP-315, and expect to read out top line data on the ongoing Phase II trial in the first half of 2024.With that, we'll now be happy to take your questions.

[Operator]

[Operator Instructions] The first question we have is from Stacy Ku of TD Cowen.

[Stacy Ku, analyst]

So we had a few. First, some really nice early onboarding of multiple hospitals. So can you just discuss your anecdotal early experience with establishing infrastructure with these institutions, early learnings and maybe what's been going really well that has surprised you all? So that's the first question. And then second, I appreciate the detailed update on compounded cantharidin. Just remind us how many FDA-registered compounding pharmacies produce cantharidin? And do you have any early thinking around the potential timing of this process? And if we could sneak a third, just very early, where is the average number of treatments trending right now?

[Joe Bonaccorso, executive]

Yes. This is Joe Bonaccorso, I'll take the question on the hospitals. So the early learnings are -- a lot of the institutions want to move away from compounding. So those are the ones that are adapting quickly to our opportunity with YCANTH. Obviously, we're working through the formulary process, and we're either working through the central pharmacy department where we're working through the ambulatory pharmacy, depending on the needs of the institution. And it also requires some infrastructure on their end to get the EMR set up and their workflows and processes. So that's been a great learning for us as a young organization. Every time we have an institution to establish, we're able to take those learnings forward to the next opportunity. And as you can see, it's starting to multiply itself and we're continuing to move forward here in the fourth quarter on it.

[Stacy Ku, analyst]

And then an update on compounded cantharidin, timing?

[Christopher Hayes, executive]

Yes. Stacy, it's Chris Hayes. So as to the number, I think your question was how many 503B pharmacies do we know? If that's the question, our internal and external investigations indicate that there are about 3 or 4 503B pharmacies on the market who may be compounding cantharidin. However, for the January through June period, there was a report that's filed with the FDA that they did not compound any during that time period. However, if you look at the websites and anecdotal evidence from prescribers indicate they're about 3 or 4 503B pharmacies on the market right now. Given our efforts with the FDA and other intended efforts that we intend to pursue outside the FDA, we hope to have some traction and gain momentum in clearing the market within 8 to 10 months.

[Stacy Ku, analyst]

Very helpful. And then my last question about the early average number of recruitments trending?

[Joe Bonaccorso, executive]

Stacy, it's Joe again. Yes. Stacy, it's Joe again. So it's a little too early to tell, because for all intents and purposes, we got boots on the ground at the Labor Day a week, and then we are using a starter dose in most cases to get doctors to trial. And we're just starting to see now the flow in October and November of second and third refills coming in. So it's too early to establish a definitive number to give you right now. Unlike an oral medication, there's no [ data and data ], you can pull daily on this. And as you know, we're every 3 weeks for therapy. So we're continuing to monitor that as well.

[Ted White, executive]

And Stacy, this is Ted. I would also point you to our CAMP-1 and CAMP-2 Phase III clinical trials, where after the first treatment, about 15% of the patients had complete clearance.

[Operator]

The next question we have is from Gregory Renza of RBC Capital Markets.

[Gregory Renza, analyst]

Ted and team, congrats on the progress and will start with YCANTH. Just 2 questions from me. As you really dig into building that awareness with respect to the launch, and we talk about or at least get anecdotal feedback on the clearance and the performance of YCANTH really maybe overextending beyond the label, certainly anecdotally, I'm just curious how you plan to maybe deliver those anecdotes collectively to enhance the buy-in across the clinician community as folks get greater experience with YCANTH and build that awareness?And then secondly, Ted, I know you had an update on VP-102 for common warts, and I know the focus is on the launch here. But I'm just curious how the FDA proceedings are potentially changing or at least reinforcing your expectations on timing for a Phase III trial with common warts.

[Ted White, executive]

So Greg, regarding the indications and KOLs. So listen, we've trained 42 KOLs nationally, and we plan to utilize them to help communicate the YCANTH message, also white papers and also point you to our recent virtual KOL event that was held recently with the positions I mentioned earlier.And then on common warts question. Again, I think that we're not going to look at any trials until the second half of 2024 at the earliest.

[Operator]

The next question we have is from Serge Belanger of Needham & Co.

[Serge Belanger, analyst]

I guess the first one on coverage. Obviously, you've done a lot of progress on the commercial and Medicaid front. Maybe just talk about when you expect to be at steady state coverage on both commercial and Medicaid? And then you're also establishing a white bag service. Just curious how widely you'll be establishing that service. And if we should expect most of the demand will come through that service until there is a J-code established in early 2024.

[Ted White, executive]

Yes. First thing on coverage. So the coverage is growing every day. Prior to our launch of this product, I've said in prior conversations that this has been very consistent feedback from the payer community since we've been out there talking to them over the last few years. It's exceeding in the first 3 months here to exceeding even where we thought it would be at over roughly 112 million lives covered, and that's going to continue to grow daily as we have more plans that are nearing the finish line on their final decisions. So we should get a steady state here by beginning of first quarter into first quarter of next year. The Medicaid states, they work on their own secular schedule. So there's a group of states that have us under review now, and there'll be more after the New Year in quarter 1, all the way through April of next year in Medicaid, but it's a very robust coverage landscape as we speak right now.Regarding white bag, we have an exclusive specialty pharmacy right now. And the mix is about 80% specialty to 20% buy-and-bill, which is predictive of our modeling in the early going, and we are fully expecting to get a J-code established in the first quarter of next year, which will continue to move towards buy-and-bill pretty rapidly.

[Operator]

The last question we have is from Kemp Dolliver of Brookline Capital Markets.

[Brian Kemp Dolliver, analyst]

Great. With regard to SG&A, you're now at $20 million in the quarter. It sounds like the sales force is fully staffed. Launch activities are underway. Should this be a pretty steady-state number looking out over the course of the next 4 to 6 quarters?

[P. Terence Kohler, executive]

Yes. So SG&A costs were $20 million on a GAAP basis for the quarter on an adjusted basis, excluding [ softcap ] about $12 million. Obviously, this is a significant step up year-over-year given that we onboarded the sales force and launched the product in the quarter. But we -- that was only -- we only had about 6 weeks of commercial activity, if you will, in this quarter. So there will be a step up going into Q4 as we'll have the commercial team onboarded for that entire quarter and out in the field for that entire quarter. So you should expect to see a step up as we go into Q4.

[Operator]

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

[Ted White, executive]

Thank you, operator. So again, I'd like to leave everyone with the fact that we've got overall strong overall interest, including earlier-than-expected interest from pediatricians. As you heard from Joe, we have strong coverage with over 112 million lives and our effective coupon program where 9 out of 10 patients are paying no more than $25. We have a C-code that's been issued, and it's important to note that it was posted in the new quarterly HCPCS file for January, which included a full descriptor of YCANTH's code, C-9164. This is a prelude to a J-code being issued and which we fully anticipate in January. We're progressing at hospitals and also private equity group practices within dermatology. And as you heard today, we're taking an aggressive stance on compounded cantharidin.With that, I'd like to thank everyone for joining our call today.

[Operator]

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