Verrica Pharmaceuticals Inc

NASDAQ:VRCA

Good evening, ladies and gentlemen, and welcome to the Verrica Pharmaceuticals Fourth Quarter and Full Year 2024 Corporate Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, John Fraunces of Lifesci Advisors. You may begin your conference.

Thank you, operator. Hello, everyone, and welcome to Verrica Pharmaceuticals Fourth Quarter and Full Year 2024 Corporate Update Conference Call.

With me on the line this evening are Jayson Rieger, President and Chief Executive Officer of Verrica Pharmaceuticals; John Kirby, Interim Chief Financial Officer; David Zawitz, Chief Operating Officer; Chris Hayes, Verrica's Chief Legal Officer; and [ Aaron Hullett ], Chief of Commercial.

As a reminder, during today's call, management will make forward-looking statements. These statements may include expectations related to the commercialization of YCANTH, the treatment of molluscum contagiosum in the United States, regulatory developments, the development of Verrica's product candidates, the company's expected cash runway and its ability to obtain funding for future operations and Verrica's 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, management 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. The earnings release that the company issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of Verrica's website.

I'll now turn the call over to Verrica's President and CEO, Jayson Rieger.

Thank you, John. Good evening, everyone, and thank you for joining us for our fourth quarter and full year 2024 corporate update call.

As most of you are aware, in the fourth quarter of 2024, we began a transition period at Verrica, including a significant change to our commercial organization, a leadership transition and a significant capital raise in November. We are executing on our turnaround plan with a more focused commercialization strategy for YCANTH while substantially reducing costs across the organization. In a few moments, I'll describe in more detail the progress we have made and continue to make on this plan and why I believe we are now on a trajectory towards sustainability as a company with a clear focus on maximizing YCANTH utilization for the treatment of molluscum contagiosum and advancing our late-stage pipeline programs. We continue to support our development partner, Torii Pharmaceutical, in their effort to obtain approval from Japanese regulators for TO-208, referred to as YCANTH in the United States, and we were happy to see their filing of a new drug application in Japan for TO-208 during the fourth quarter of 2024.

We are also excited to continue to work with Lytix Biopharma in advancing our basal cell carcinoma asset, VP-315. At our update at the end of Q3 last fall, we indicated a belief that it could be into the first quarter of this year before we saw business stabilization and the signs of working through channel inventory. I am pleased to report that we have already seen new purchases from our distributors in the fourth quarter to replace depleted inventory levels ahead of what we had previously anticipated. We look forward to updating you with more details regarding Q1 2025 dispense units in the near future.

We are making significant progress in advancing our clinical stage pipeline, which includes pursuing YCANTH for common warts as an additional indication as well as our novel oncolytic peptide VP-315 for the treatment of basal cell carcinoma. Each of these programs represent potential key value drivers for our company and, in my view, remain underappreciated assets given each program's potential to become first-in-class treatments in 2 large dermatological conditions with significant unmet medical need. We are in a unique development position where we believe we will be able to advance our common wart program through Phase III in collaboration with Torii and also achieve key data and regulatory feedback for our basal cell program with minimal additional cash outlay for Verrica.

We also made significant progress with respect to our financial position, raising approximately $42 million in an equity follow-on offering in November and subsequent to the end of the quarter, obtaining a waiver of going concern covenant for the quarter and year ended December 31, 2024, and the first quarter of 2025 from our lending partner, OrbiMed.

I will now provide an update on our commercial activities for YCANTH and related results from the quarter. In November, we announced a new commercialization strategy focused on driving demand for YCANTH in territories with high prevalence of molluscum and established strong insurance coverage for YCANTH. This focus was also intended to make Verrica become a leaner and more efficient company in the process. I am pleased to say that over the last several months, that is exactly what has happened. As announced in our business update in December, we have reduced our operating expense burn rate by approximately 50% while not only maintaining our prior sales levels, but also achieving positive growth in dispensed applicator units in the fourth quarter compared to the prior quarter.

Our sales representatives have substantially increased their productivity, measured as an average of sales per selling day, and we are now seeing the results of their efforts. Our fourth quarter operating results do reflect the beginning of this success, and we expect to see further reflection of this strategy in the results for the first quarter of 2025 and beyond. In the fourth quarter, we reported YCANTH dispensed applicator units of 8,654 versus the prior quarter units of 7,706, which represents sequential quarterly growth of 12.3%. And when compared to the second quarter of 2024 of 5,975 units, the YCANTH applicator unit growth increased by 44.8%.

Another important dimension of our commercial realignment was to make it easier for physicians to order and acquire YCANTH a buy and bill basis. We, therefore, introduced a new single applicator configuration for YCANTH or the one count, which became commercially available this quarter. We believe the one count will reduce acquisition costs for physician practices in certain channels and potentially expand distribution and patient access to YCANTH. Furthermore, we have made great strides in increasing access to the pharmacy benefit route by adding local specialty pharmacies to our strong relationship with Nufactor, our nationwide specialty pharmacy.

With respect to YCANTH inventory, we believe we have now fully reserved for distributor inventory reasonably expected to be returned due to lower-than-anticipated pull-through and observed a significant reduction in distributor inventory levels from our active distributors exiting the fourth quarter. Based on our latest data, we believe that inventory has now reached a stable normalized level where demand for YCANTH applicator units will translate into new demand-driven revenue regularly going into or going forward into 2025.

I'd now like to discuss our plans to develop YCANTH for the treatment of common warts. Recall that earlier last year, we amended our licensing agreement with our development and commercialization partner, Torii Pharmaceutical, which enabled us to equally split the cost of a new planned global Phase III clinical program in common warts. Torii previously agreed to fund Verrica's portion of the cost as an offset to Torii's future payment obligations to Verrica for meeting regulatory milestones and royalties, the sales of YCANTH for molluscum contagiosum and common warts in Japan. As we noted in December, Torii filed a new drug application in Japan seeking approval of YCANTH called TO-208 in Japan for the treatment of molluscum, and we look forward to helping Torii reach an estimated 1.6 million molluscum patients in Japan after they obtain regulatory approval.

Furthermore, Torii will make a milestone payment of $8 million to Verrica upon initiation of a Phase III clinical trial with initiation of the global program potentially starting as early as mid-2025. Considering the fact that there are approximately 22 million patients in the U.S. alone with common warts and no FDA-approved therapies, this makes common warts the single largest unmet need in all of dermatology. Under our amended funding structure with Torii, the capital required from Verrica to fund this large Phase III program is expected to have almost no impact on our cash position, which, in my view, is fairly remarkable considering that this is a global registrational trial where we will still retain 100% of commercial rights to YCANTH in the U.S. and elsewhere around the world other than Japan.

I'd now like to focus the recent progress we have made in advancing our late-stage clinical oncology asset, VP-315. In October 2024, we presented 2 posters at the 2024 Fall Clinical Dermatology Conference, featuring positive preliminary top line results of VP-315 for the treatment of basal cell carcinoma. The posters include safety and histologic clearance data from 82 patients with up to 2 target basal cell carcinoma tumors in Part 2 of the Phase II study. As a reminder, Part 2 of the Phase II study was designed to explore dosing regimens to help us identify the recommended regimen for a Phase III study program as we identified 8 milligrams as the optimal dose in Part 1 of the study. Preliminary top line results showed that approximately 51% of tumors treated with VP-315 achieved complete histological clearance, while those patients with a residual tumor achieved, on average, approximately 71% reduction in tumor size. VP-315 was well tolerated. No treatment-related serious events were reported in the study and most treatment-related adverse events were mild to moderate.

Most recently, we presented the results from a post-hoc analysis of the data from Part 2 of the study at the 2025 Winter Clinical Dermatology Conference, which demonstrate that treatment with VP-315 led to a calculated objective response rate or ORR of 97%, which is defined as the percentage of study subjects who do not demonstrate disease progression and who experience at least 30% reduction in tumor size, along with partial or complete response following treatment. This is quite a compelling observation as it suggests that nearly every subject of the study obtained benefit from VP-315 treatment.

We still expect to report genomic and immune response data from this trial in the coming months and to receive minutes from an end of Phase II meeting in the first half of 2025, which will be critical for gaining alignment for the advancement of the program into Phase III trials. We are highly encouraged by these positive preliminary top line results, which we believe demonstrate the potential for VP-315 to change treatment paradigm for patients with basal cell carcinoma, the most common form of skin cancer.

Over the last several months, I've had the opportunity to speak with many investors about Verrica. And without a question, I believe our common warts program and basal cell carcinoma programs are 2 significantly underappreciated assets. To that end, we will continue to provide updates on the progress of these pipeline programs, while the majority of the organization remains laser-focused on the YCANTH for molluscum commercial efforts.

I'll now turn the call over to our Interim Chief Financial Officer, John Kirby, to discuss our recent financing activities and to review our fourth quarter and full year 2024 financials.

Thanks, Jayson.

I'd like to start by covering our recent financing activities, which have enabled us to strengthen our balance sheet. In November, we raised $42 million in a public offering of common stock, prefunded warrants and accompanying Series A and B warrants. As you will recall, in July 2023, Verrica entered into a debt financing with OrbiMed. And upon closing of the agreement, we borrowed $50 million from the facility. In February of this year, we negotiated with OrbiMed a waiver of certain covenants under our credit agreement, including the requirement that there be no going concern qualification with respect to the financial statements for the periods ended December 31, 2024, and March 31, 2025.

Turning to the financial results. For the fourth quarter and full year of 2024, we reported total revenues of $0.3 million, which was substantially all YCANTH revenue. Net YCANTH revenue reflects shipments to our distributor partners, offset by standard gross to net adjustments, including actual or anticipated product returns, off-invoice discounts and distribution fees and expenses. For the full year 2024, we reported total revenue of $7.6 million versus $5.1 million in the prior year. Total revenue for 2024 included net product revenue of $6.6 million versus net product revenue of $4.7 million in the prior year. As a reminder, YCANTH became available for commercial sale and shipment to patients in August of 2023, and so we did not recognize any product revenue prior to that point.

Collaboration revenues of $29,000 in the fourth quarter of 2024 related to our supply of applicators to Torii in connection with their development and commercialization activities. For the full year 2024, collaboration revenue was $1 million compared to $0.5 million for the year ended December 31, 2023. Similarly to the fourth quarter, collaboration revenue for the full year 2024 and 2023 was related to supplies and development activity provided to Torii as needed support to the clinical supply agreement.

Gross product margins for the full year 2024 were 72%. Cost of product revenue of $1.9 million included $0.9 million of obsolete inventory costs. Research and development expenses of $1.2 million in the fourth quarter of 2024 decreased versus the fourth quarter of 2023 by $4.2 million, primarily driven by a $2.1 million decrease of clinical trial costs related to VP-315 as well as costs related to increased headcount of $1.2 million and a decrease in regulatory costs of $0.7 million. For the full year 2024, research and development expenses were $11.8 million compared to $20.3 million for the year ended December 31, 2023. The decrease of $8.5 million was primarily attributable to reductions of costs related to YCANTH pre-approval activity of $3.8 million and decreased clinical costs for VP-315 of $3.1 million.

Selling, general and administrative expenses of $10 million in the fourth quarter of 2024 decreased versus the fourth quarter of 2023 by $6.8 million, reflecting our commercial realignment activity and realization of cost savings. For the full year 2024, selling, general and administrative expenses were $58.8 million compared to $47.3 million for the year ended December 31, 2023. The increase of $11.5 million was primarily a result of higher expenses related to commercial activities for YCANTH for the treatment of molluscum, including increased compensation, recruiting fees, benefits and travel due to ramp-up of sales force of $8.5 million as well as increased commercial-related costs of $5.1 million.

GAAP net loss was $16.2 million or $0.24 per share for the fourth quarter of 2024 compared to a GAAP net loss of $24.6 million or $0.53 per share for the fourth quarter of 2023. GAAP net loss was $76.8 million or $1.48 per share for the full year 2024 compared to a GAAP net loss of $67 million or $1.48 per share for the prior year. On a non-GAAP basis, which excludes stock-based compensation, noncash interest expense and change in fair value of embedded derivatives for the full year 2024, net loss was $64.6 million or $1.25 per share compared to a net loss of $51.8 million or $1.14 per share in the full year 2023.

And finally, as of December 31, 2024, Verrica had aggregate cash and cash equivalents of $46.3 million. Under GAAP, the cash and cash equivalents as of December 31, 2024, would not be sufficient to fund operations for the 1-year period following the release of our financial statements. However, should Verrica receive the $8 million milestone payment from Torii triggered by the initiation of the Phase III clinical trial in Japan for common warts or receive a portion of the $25 million in proceeds from the exercise of Series A warrants issued as part of our November 2024 equity financing, which expire in November of 2025, we could have sufficient cash to fund our operations for such period. Nonetheless, we will continue to prudently use our cash and explore opportunities to further bolster the strength of our balance sheet.

Before turning the call back over to Jayson, I'd like to provide some additional details, which relate to partitioning of our debt into current and long-term liabilities and the increase in valuation of embedded derivatives related to our OrbiMed agreement. Verrica did not meet threshold specified in the OrbiMed debt agreement as of December 31, 2024, thus triggering the initiation of principal payments beginning in 2025. As principal payments have begun in 2025, Verrica was required to reclassify the debt balance previously classified as all long-term debt to have both a current and long-term component on the balance sheet.

Finally, I'd like to address embedded derivatives in the structure of the OrbiMed debt facility and its impact of their valuation on our financials. Since inception of this debt, the repayment of the debt prior to the balloon payment was deemed to not be probable, and therefore, the derivatives were valued at 0. However, since we are now required to make monthly principal repayments, the embedded derivatives, which include the exit fee and repayment fee were deemed to have value. For the fourth quarter, the change in fair value of the embedded derivatives resulted in a noncash expense of $2.6 million in our statement of operations.

I'll now turn the call back to Jayson for closing remarks.

Thanks, John.

Although I arrived at Verrica just a few months ago, I can tell you that we have made an extraordinary amount of progress over a very short period of time. We are faithfully executing on our new strategic initiatives across every area of our company, and I believe we are now on a pathway towards strong and sustainable growth for YCANTH and our development programs. We have cut nonessential spending as we execute on our strategy. Core to our commercial strategy is an emphasis on fostering an environment that will lead to more solid long-term relationships with the physicians and the patients that we serve. As I mentioned earlier, we are also excited about the outstanding progress we are making in our clinical stage pipeline. As these programs continue to advance, we believe investors will see the massive potential of these programs, each of which could become the new standard of care in their respective indications.

In summary, the Verrica team has executed with a true sense of purpose and urgency in the few short months since I joined in November. As a commercial stage company with a robust pipeline, we are excited about the future of Verrica. We are seeing the fruits of the efforts over the last few months take hold as reflected by increased ease of access to YCANTH by HCPs, increased dispensed units, reduction in channel inventory and advancement of our pipeline programs, all at a pace ahead of our initial thoughts late last year. In YCANTH, we not only have a commercial product for the treatment of molluscum that is already back on a positive growth trajectory, but we also are uniquely positioned to address the largest and most underserved population in all of dermatology in common warts as well as perhaps change the paradigm in which HCPs treat basal cell carcinoma through VP-315.

I would like to thank all of my Verrica teammates, both in the field and in our corporate organization. Going through a turnaround is difficult and requires substantial additional efforts to properly execute and the way that I am seeing our team respond to tough situations has strengthened my resolve that we can be successful and achieve positive outcomes for our physician customers and their patients. We believe we will emerge from this transition as a much stronger and capable team, one working in close alignment to ensure that Verrica achieves its potential and becomes one of the most innovative, high-growth companies in dermatology drug development.

With that, we'd be now happy to take your questions. Operator?

[Operator Instructions] We will move first to Stacy Ku with TD Cowen.

Congratulations on the progress. So maybe a first question around maybe that patient demand. You talked about the applicators that are dispensed, but are you getting a sense around the number of patients roughly that are being treated with YCANTH maybe from average dosing? Maybe talk about the feedback that you're getting from clinicians about whether or not it's now getting a little bit easier to access YCANTH, whether they're able to kind of get that infrastructure that you're trying to improve? So that's the first question.

And then obviously, the second question is looking to '25, can you comment what you're seeing early in the year in terms of YCANTH adoption now that we're in March? I understand that you're trying to stay high level, but how is the new single applicator doing? How is broadening to pediatricians? Any type of maybe high-level commentary about early '25 would be appreciated as you're trying to kind of change the strategy.

And then maybe the last comment is going to be around your expectations on sales for '25. Consensus is around $15 million. So maybe discuss your thoughts on where sell-side is versus some of the sales force investment and potential R&D investment as it relates to your guidance to be cash positive monthly operating results by year-end.

Thank you, Stacy. This is Jayson. I appreciate all those questions. I'll try and tackle them in order. If I leave something out, please feel free to follow up. In general, we're seeing very good adoption and interest in the use of YCANTH for the treatment of molluscum, both across the pediatrician market, but also our core dermatology market as well. The patients are seeking the dermatologists and the pediatricians and are getting treated. Obviously, we published our clinical results and the efficacy and safety of YCANTH has been disclosed and has been well accepted by the medical professionals, and we're seeing the continued use of the product. Depending on the pediatrician or the dermatologist, you will see them using obviously several applicators or sometimes one depending on the need of that patient, but we still encourage treatment to clearance as we did in our clinical study and as the FDA help us in designing that program. The mixture of those treating with YCANTH continues to be a blend of all health care providers as we continue to roll out the program.

In terms of 2025, I think we're continuing to see good momentum that we saw going into the end of last year. As we discussed in the past, we expected this to be a turnaround and would take into the first quarter to realize, and we're starting to see that traction even ahead of our original schedule. We're still being cautiously optimistic but remain optimistic and confident we'll continue to see growth in the business. And we're wrapping up the quarter, and we'll be disclosing updates on that, obviously, in the next few months as the quarter comes to a close.

In terms of guidance and consensus, at this point, we're going to just leave guidance where the analysts have left it so far. And as we gain momentum in the year and have better clarity on that, we may have further conversations. But at this point, our policy is not to provide revenue guidance.

We'll go next to Gregory Renza with RBC Capital Markets.

Congrats on the progress ahead of schedule. Jayson, maybe just building on your commentary as you're focusing the field force and your efforts and as you've really geared towards that demand generation. I'm just curious if you could comment on maybe some of those seasonal tailwinds or even sort of the periodic headwinds that can occur throughout the year as certainly we enter the warmer months, the spring and the summer. Do you have any views on what you're hearing as far as potential lifts or momentum that you could get as it converges with the demand generation you're working on?

No problem. So I would say that we've been establishing this business to be poised for both changes in seasonality if they were to occur. Often, there is commentary that as the weather warms up and kids are more active outside that could continue to support the growth. And we're building our sales force and our team to be prepared for both the seasonality should it occur going into the second quarter and third quarter and beyond this year as the weather warms up. Fortunately, it's beautiful weather out today. I think spring is rapidly approaching, and we'll see that. Obviously, there was some rough winter weather this year, and we've been very, very optimistic by what we've seen so far, given the weather, the time of year, the deductible season, et cetera. And so we remain cautiously optimistic about what this quarter and the upcoming quarters will look like.

That's helpful. And maybe just a longer-term question. Maybe just remind us of how you're framing up the barriers to generic entry, the ultimate IP protection that you see with respect to YCANTH?

We actually have a very robust IP portfolio that takes us well into the future. And in terms of generics, obviously, that's a long way off. Historically, the compounders have been the predominant concern, and we're working through both any challenges from them, but also just going to where the market is, and we're finding good adoption to our product. We have historically removed the 503B compounders from the market predominantly from Canada. That settlement was announced last year, and we're moving forward with our program and finding good adoption.

We'll go next to Serge Belanger with Needham & Company.

This is John on for Serge today. So first on YCANTH, you've previously spoken on looking to expand usage beyond dermatologists into the pediatric setting. Just wanted to gauge what sort of impact you've had on this front thus far and what you aim to achieve in terms of distribution between pediatrics and dermatologists in the future?

So to that front, I would say that we are focusing on where the patients are going. And we've seen a growth in the pediatric market. The product did start in the derms. And I would say the derms have been a customer base that's both been loyal to us, and we continue to both focus on and support. And we have found, in some cases, our pediatric derms, other derms have worked with us to expand access to their pediatric colleagues in the same community. At this moment, I would say the majority of our customers are still dermatologists who see the patients, but we're seeing a very large growing percentage of the pediatric or the pediatricians treating with YCANTH. So I would expect over time, that mix is probably going to waffle back and forth between 60-40, 40-60, depending on how this product rolls out, but we're rapidly approaching sort of that equilibrium now.

Okay. That's great. And real quick on VP-315. Obviously, we'll see some additional data and FDA minutes in the first half here. But considering your new cost structure, I was just curious what your plans are in terms of timing to move this program into Phase IIIs.

Yes. So as we've indicated before, we're very fortunate that all -- the majority of the expense for that program was spent in the prior year and the remaining data that's being collected in the regulatory interactions are de minimis in cost. Once we have that data in hand and that full package, we'll evaluate the program. It will also help us determine what the cost of that development program might look like, and we can then explore the best way to advance the program with all options available to us. The company does currently own the full rights to the program. So we have lots of opportunity for developing and advancing it. And we'll make a disclosure on what we may do to advance it once we have definitive FDA feedback and can confirm on what a development plan looks like.

We'll go next to Kemp Dolliver with Brookline Capital Markets.

You're seeing a sequential uptick in demand for applicators and continuing to make some progress. What do you think you need to do to achieve what I think you've described as a hockey stick improvement in demand at some point?

Sure. So I think growth in any business requires 2 things: acquisition of new customers as well as continued utilization and growth of existing customers. Fortunately, we're seeing both in this business as we've done the turnaround and are moving forward. Our sales reps are very, very active in the field in dealing with customer needs. Our reimbursement teams are there to help. We have an expanded access through telesales to cover white space and additional support. And ultimately, it's going to require advancing into larger markets. And so we have historically worked with and are engaging with some of the larger practices, both that exist in the pediatric and the dermatology community as well as expanding with the independent pharmacies and our pharma distribution partner, Nufactor. I think those are ways that we can provide product in a scalable way to customers and start seeing extra reach. So I think that's one of -- those are some of the key areas we'll see expansion and growth of the market.

It appears we have no further questions at this time. I will turn the conference back to Mr. Rieger for any additional or closing comments.

Yes. Thank you, operator. I'd like to thank you all for joining this evening, and we look forward to providing updates on our progress throughout 2025. Thank you very much.

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.