Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) Q4 2023 Earnings Call Transcript

Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) Q4 2023 Earnings Call Transcript February 29, 2024

Verrica Pharmaceuticals Inc. misses on earnings expectations. Reported EPS is $-0.53 EPS, expectations were $-0.47. Verrica Pharmaceuticals Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Kevin Gardner: Thank you, operator. Hello, everyone and welcome to Verrica Pharmaceuticals fourth quarter and year end 2023 corporate update and earnings conference call. With me on the line this morning are Ted White, President and Chief Executive Officer of Verrica Pharmaceuticals; Joe Bonaccorso, Chief Commercial Officer; Terry Kohler, Chief Financial Officer; Dr. Gary Goldenberg, Verrica’s Chief Medical Officer; and Chris Hayes, Verrica’s Chief Legal Officer. As a reminder, during today’s call, management will make forward looking statements. These statements may include expectations related to the launch and commercialization of YCANTH for the treatment of molluscum contagiosum in the United States, regulatory development, the development of Verrica’s product candidates, our expected cash runway as well as overall business strategy and planned operations.

These forward-looking statements are based on the company’s current expectations and involve inherent risks and uncertainties. And based on those risks and uncertainties, Verrica’s actual results and timing of events could differ materially from those anticipated in such forward-looking statements. Please see the Verrica’s SEC filings for important risk factors. Verrica cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information future events or changes in expectations. In addition, during today’s call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP.

There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website. I’ll now turn the call over to Verrica’s President and CEO, Ted White. Ted?

Ted White: Thank you, Kevin and good morning, everyone, and thank you for joining us for our fourth quarter and year end 2023 earnings call. I’d like to begin today’s call by providing an update on Verrica’s commercial launch since our last quarterly earnings call back in November. I’ll then ask our Chief Commercial Officer, Joe Bonaccorso to provide a more detailed review of our commercial activities and YCANTH launch. Following Joe’s remarks, our Chief Financial Officer, Terry Kohler will review our fourth quarter and year end financial results. We’ll then open up the call to take your questions. First and foremost, the organization continues to be focused on our top priority the launch of YCANTH, which is the first and only commercially available FDA approved treatment for molluscum contagiosum.

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Q&A Session

With our first full quarter of commercial operations now complete, we’re beginning to see traction in many of our targeted dermatology and institutional accounts as we execute our launch plan. Our fourth quarter execution resulted in $1.9 million in YCANTH net revenue, which we believe demonstrates our continued progress in driving adoption and reflects growing confidence in our prescriber base as we work to expand coverage of YCANTH to over 200 million commercial and Medicaid lives at the end of the year. As a further update on covered lives in December we agreed to terms and coverage under the medical benefit with two of the largest PBMs. We’re working to finalize those agreements. However, coverage under those medical plans became effective.

In addition to expanding our lives covered, on January 29th, we announced that the CMS issued a permanent J-code J7354 for Ycanth, which is under the Healthcare Common Procedure Coding System process. We expect that J-code for Ycanth will become fully published on April 1st, securing that J code for Ycanth represents a critical milestone in our commercial strategy, as J-code enables providers to use the same code across all payers for reimbursement. We believe the J code will help grow Ycanth utilization among the U.S. Medicaid patient populations and increased overall buy-and-bill account utilization by simplifying the billing and reimbursement process for Ycanth. In the fourth quarter, Verrica also expanded our Ycanth product distribution capabilities when we entered into an agreement with Walgreens to distribute Ycanth through a specialty pharmacy.

Walgreens joins Verrica’s existing specialty pharmacy, Nufactor who continues to be instrumental in helping the company distribute Ycanth among institutions, dermatology, and pediatric medical practices. The Walgreens partnership is exciting as we look forward to the opportunity to grow that relationship and leverage Walgreens’ physical footprint and existing relationships with derm-on-call to build community awareness and grow treatment rates. On February 1st, we executed a distribution agreement with DMS Pharmaceutical, a prime vendor to the U.S. Department of Defense to provide Ycanth to U.S. Military installations around the world. The DMS relationship was in direct response to outreach from the U.S. Military treatment facilities requesting information on how to procure Ycanth for Military Personnel.

As the fourth quarter came to a close, we transitioned into the first quarter, we saw wins on the institutional side of our business with major IDNs and hospitals aiding Ycanth to formulary and placing orders. We expect these wins to continue as we see more success in our efforts to combat unapproved compounding cantharidin along with the anticipate publishing of the J code on April 1st. Now, I’d like to give you an update on our efforts to eliminate the amount of comparative being improperly compounded for the treatment of molluscum. As you know we have consistently taken the position that we intend to fully exercise our legal rights and execute on our multi-prong strategy to clear the market of significant suppliers for unlawfully compounding cantharidin.

At the same time, we’ve cautioned you that we may not see the results of our efforts immediately, rather we have said that as the cumulative effects of our plan started to take effect, we’d expect to see noticeable reduction in the availability of compounding cantharidin within a 12-month period of time. Well, we believe we’re on track and well on our way to hit our timeline. For example the last 503B pharmacy in the United States on the FDA’s outsourcing facility product report to report compounding cantharidin has discontinued compounding cantharidin and informed it’s over 400 institutional customers of the availability of Ycanth. In addition a number of large national license 503A pharmacies have also agreed to discontinue compounding cantharidin.

Consistent with this reduction in the supply of compounding cantharidin, we are regularly hearing in the market about the lack of availability of compounding cantharidin and receiving inbound requests for Ycanth from providers who are also informing us that they can no longer obtain compounding cantharidin. As we witness the available supply of compounding cantharidin in the United States significantly decrease, we are further escalating our efforts to ban the EU legal importation of compounding cantharidin from Canada and specifically, the illegal importation of non-FDA approved cantharidin products from Dormer labs in Canada. Similar to the actionable results we saw from our efforts with the 503A and 503B pharmacies, we believe that as we continue to execute and escalate our intended strategies the illegal importation of cantharidin from Canada will be discontinued.

I’d now like to provide an update on our pipeline. On January 5th, we announced that the last patient has been dosed in Part 2 of the company’s Phase 2 trial for VP-315, a potential first-in-class oncolytic peptide for the treatment of basal cell carcinoma or BCC. VP-315 is a peptide that has been engineered to provide more targeted delivery to stimulate the patient’s immune system and destroy cancer cells. We remain excited about the opportunity for this asset, which we view as either a potential non-surgical alternative to Mohs surgery or as a neoadjuvant chemo therapeutic for a larger base of cell carcinomas, including advanced tumors or non-resectable basal cell. The ongoing Phase 2 trial is a two part, open-label, multicenter, dose escalation, proof-of-concept study with a safety run-in designed to assess the safety, pharmacokinetics and efficacy of VP-315 when administered intravitreally with adults with biopsy-proven BCC.

The study enrolled 92 adult subjects with a histological diagnosis of basal cell carcinoma in at least one eligible target least. Our interpretation of the data from this study will focus on complete clearance as well as overall tumor shrinkage on patients who may have residual tumors. We expect initial results from the study in the first half of 2024. From an ex-US perspective, in December, we announced that Verrica’s development and commercialization partner, Torii Pharmaceutical, reported positive top line results from Phase 3 trial of TO-208, which is marketed as YCANTH in United States for the treatment of molluscum in Japan. The top line results show that the proportion of subjects achieving complete clearance of all treatable molluscum lesions at the completion of the confirmatory study, the primary endpoint of efficacy was statistically significant versus placebo.

TO-208 demonstrated similar results to YCANTH Phase 3 program and was well tolerated during the study. Torii intends to submit a manufacturing and marketing application for the product in Japan based on the results of the Phase 3 trial and other studies currently being conducted. In addition to molluscum, as we disclosed on January 4, we announced alignment with the FDA with respect to the Phase 3 clinical development plan for YCANTH for the treatment of common warts, following our Type C meeting. More specifically, we reached agreement with the FDA on the overall design components of a pivotal Phase 3 study for YCANTH that would support an efficacy supplement for the proposed indication of common warts. We will be seeking additional FDA feedback on our updated clinical design in the second quarter of this year.

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

Joe Bonaccorso: Thanks very much Ted. As Ted mentioned, we had our first full quarter of commercial operations and we are gaining increasing traction among dermatology practices, pediatricians and institutions. There are a significant and growing interest in prescribing and adopting YCANTH among physicians and broad acceptance on the payer side. We also feel our agreement with DMS and the opportunity with the DoD will further accelerate adoption. Since our last call, insurance coverage of YCANTH has grown significantly. We have increased our number of covered lives from approximately 112 million and now over 200 million in both commercial and Medicaid. Our coverage includes major PBMs such as CVS, ESI and Optum. I’m pleased to say that our coverage metric has exceeded our internal expectations and we believe this will ultimately translate into an acceleration in prescription growth of YCANTH over the next several months.

In addition to our market access work, our sales force reach has expanded over the last five months. With over 4,000 healthcare professionals trained, we are seeing major integrated delivery networks adopt YCANTH with both the Mayo Clinic and Kaiser Permanente beginning to order products through our distribution partner Triple-S. We’re also continuing to work to gain adoption with private equity-backed dermatology and pediatrician group practices. In support of our field efforts, we have expanded our sales footprint to 53 territories from 50 at launch. We’re also adding two additional hospital reps as we continue to focus on driving adoption on the institutional side. With HCPs at major IDNs beginning to adopt and with several other significant formulary wins, the incremental hospital reps will be critical in driving demand pulling through orders and maximizing the market opportunity.

We are also working towards adding two major hospital GPOs and utilize their support to drive further adoption. In addition, we’re adding 14 pediatric reps in the first quarter, and so we plan to have a total of 20 pediatric reps in the field by the end of the quarter. Our focus on the pediatric footprint is fueled by encouraging inbound traffic, which is consistent with our internal market assessment of the Luscombe diagnosis from pediatric practices across the country. Due to the size of the pediatric market, our plan is designed to be efficient around major MSAs and we will continue to work in coordination with our physician buying group partner, Main Street Vaccines and pediatric focused GPOs. I also wanted to touch again on the J-code.

Deco Ted’s earlier comments, the receipt of the J-code is expected to be a significant driver of adoption among dermatologists for YCANTH. We believe that the J-code which is expected to be published on April 1 will streamline reimbursement, accelerate benefit verifications and provide consistent reimbursement, which is more challenging with a miscellaneous J-code. We have received supportive feedback from practitioners, since we announced our J-code receipt and we are working hard to educate the market and prepare for our code becoming effective on April 1 of this year. I’ll now pass it to Terry to review our fourth quarter and year end financial results. Terry?

Terry Kohler: Thanks, Joe. YCANTH revenues were $1.9 million in the fourth quarter of 2023, with total 2023 revenue for YCANTH of 4.7 million. This revenue represents the continued fulfillment of ex-factory orders to our distribution partner, FFF Enterprises as we continue to build awareness, drive adoption and expand insurance coverage and formulary access. In addition, the Q4 units were partially in support of our expanded distribution footprint with the addition of Walgreens as a second specialty pharmacy partner. We also recognized collaboration revenues of 122,000 in the fourth quarter of 2023 and 466,000 for the full year 2023 related to the clinical supply agreement with Torrey Pharmaceuticals. Gross product margins for the full year 2023 were 94%, which continued to benefit from certain components of standard cost of goods sold, including bulk production and assembly of applicators from our registration batches, having been expensed as R&D prior to approval.

Research and development expenses of $5.3 million in the fourth quarter of 2023 declined versus the third quarter of 2023 by $1.2 million, primarily driven by reduced stock compensation expense. For full year 2023, R&D expenses increased to $20.3 million from $12.2 million in 2022, driven by increased CMC costs related to the pre-approval activity, increased clinical trial costs for the VP-315, as well as an increase in stock-based compensation expense. Selling, general and administrative expenses of $17 million in the fourth quarter of 2023 declined versus the third quarter of 2023 by $3 million, driven primarily by a reduction in stock-based compensation expense. For full year 2023, selling, general and administrative expenses increased to $47.3 million from $17.4 million for the full year 2022.

The incremental spend was primarily driven by the approval and launch of YCANTH during 2023 and an increase in stock-based compensation expense. GAAP net loss was $67 million or $1.48 per share for fiscal 2023 compared to a GAAP net loss of $24.5 million or $0.72 per share for the prior year. On a non-GAAP basis, which excludes stock-based compensation and non-cash interest expense, the full year 2023 net loss was $51.8 million or $1.14 per share compared to a net loss of $17.4 million or $0.51 per share in full year 2022. And finally, as of December 31, 2023 Verrica had aggregate cash and cash equivalents of 69.5 million. The Company expects its cash and cash equivalents as of December 31, 2023 will be sufficient to fund operations into the second quarter of 2025.

And I’ll now turn the call back to Ted for closing remarks.

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

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] is from Stacy Ku of TD Cowen. Please go ahead.

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

So that’s the second question. And then the third is just very early. I know it’s very early, but are you getting a sense of how the adopters are using the product? Are they treating to clear? Thanks so much.

Ted White: Thanks for the question, Stacy. I’ll turn that over to Joe Bonaccorso.

Joe Bonaccorso: Good morning, Stacy. To answer your first question around the IDNs, we have obviously a full implemented strategy. It’s a great opportunity for YCANTH. We have Kaiser Permanente and Mayo currently ordering, and we’ve got several other IDNs close to the finish line with formulary approval and expected first order sometime in quarter two. We’ll continue to look at and prioritize by the largest opportunity. And then there’s other strategies around some of the smaller IDN and health systems throughout the country, hence the expansion in the institutional field force to help drive that even more. Second question around, I believe it was around how the dermatology or the split between specialty pharmacy and buy and bill, that’s as you would expect with a miscellaneous J-code start.

It’s been leaning more towards white bag specialty pharmacy with about 80% of the volume going through there and 20% buy and bill. And that’s a compilation of physician offices in our health systems as well. We expect the buy and bill component of this launch to grow. The permanent J-code expected to be published on April 1. And then the last question, I believe, was around treat to clear. We’re seeing dermatologists following that algorithm to want to treat the patient to clearance. Everything we’ve seen so far in the anecdotal feedback we’ve gotten from our customers is pointing in that direction, that they want to get through a full course of therapy with the patient. And obviously their assessment on when they think the patient is cleared and doesn’t need anything else.

Stacy Ku: Okay. That’s helpful. And if I could ask just a quick follow-up on the IDN contribution. What kind of — this seems to be kind of bulk order, so how should we think about the percentage of this type of contribution in 2024 versus some of the — as we think about guidance of consensus of 2024, around $20 million for the year? Thanks so much.

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

Stacy Ku: Very helpful. Thank you.

Joe Bonaccorso: You’re welcome.

Operator: The next question we have is from Gregory Renza of RBC Capital Markets. Please go ahead.

Unidentified Analyst: Hi, guys. It’s Anishan for Greg. Congrats on the quarter and thanks for taking my questions. Just a couple for me. How should we be thinking about the current molluscum TAM that remains occupied by treatments such as curettage and cryotherapy? And at what pace on a relative or even absolute basis, do you anticipate conversion to YCANTH? And then just really quickly, how should we be thinking about sampling of YCANTH through 4Q and any residual into 2024? Thanks again.

Joe Bonaccorso: So I’m sorry I missed a little bit of your question in the middle there. But I believe you’re asking, how should we think about curettage and cryosurgery still being used versus YCANTH. When we got into this market, it was understood that curettage, it was probably used about 10% to 15% of the time at most and cryosurgery was somewhere in that 30% mark of the source of business. So we’re continuing to think about it as physicians don’t like using cryosurgery especially on small children. It’s very painful. It’s technique dependent and we think we can continue to take from that piece of the pie as well as continue to convert on the compound the compounding piece of the market and also get new doctors off the sideline. They have not treated without an FDA-approved product that they’re ready.

Unidentified Analyst: Great. Thank you so much. And then just real quick on that. On the YCANTH sampling if there was any through 4Q and any into 2024 just for some clarity there?

Joe Bonaccorso: Sampling you’re asking about?

Unidentified Analyst: Yeah.

Joe Bonaccorso: Yeah. So we do continue to sample as needed. Sometimes it’s just a function of getting our coverage finalized with whoever the insurance company may be for that doctor. We didn’t have the permanent J-Code as that comes on board, now we expect more and more same day treatment. So that will continue to drive use of samples down and convert to real-time prescription. So it’s a very efficiently managed program by us and we’re very judicious in how we go about doing it.

Unidentified Analyst: Great. Thank you so much.

Joe Bonaccorso: You’re welcome. Thank you for the question.

Operator: Next question we have is from Oren Livnat of H.C. Wainwright. Please go ahead.

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

Ted White: Oren thanks for the question. As you know as we’re ramping coverage up, we have over 200 million lives now, which is exceptional for a product this young in its life cycle. It’s a medical benefit driven product. So you typically see less prior authorizations and you went on the pharmacy benefit side, you’ll still have occasionally a prior authorization, which will be the label just the doctor having to put in their notes, the patient was two years of age and older. But to your question now, we have a J-Code assigned that streamlining the reimbursement portion of it, and if your coverage is clean, i.e. no prior authorization. That’s going to facilitate same-day treatment for that patient under that insurance company.

If there’s a prior authorization, they got to just get that cleared and treat. So they have got to submit the paperwork rounding. But having both, having this 200 million lives and the J-Code now working in simpatico if you will, should really help accelerate the adoption of YCANTH even more.

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