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Verrica Pharmaceuticals(VRCA) - 2020 Q4 - Annual Report

PART I Overview of the company's business, operations, and associated risks Business Verrica Pharmaceuticals is a clinical-stage dermatology therapeutics company focused on developing and commercializing treatments for skin diseases Overview Key product candidate VP-102 targets molluscum and warts, with an NDA resubmission and strategic collaborations - Verrica's lead product candidate, VP-102, is a proprietary drug-device combination for treating molluscum contagiosum and common warts, both of which have no FDA-approved treatments13 - The company resubmitted its New Drug Application (NDA) for VP-102 for molluscum in December 2020, and the FDA has set a PDUFA goal date of June 23, 2021; the initial Complete Response Letter (CRL) cited Chemistry, Manufacturing, and Controls (CMC) and human factors issues, with no clinical deficiencies14 - Verrica entered into a collaboration with Torii Pharmaceutical to develop and commercialize cantharidin-based products in Japan, receiving an $11.5 million upfront payment and eligibility for up to $58.0 million in milestones1718 - The company licensed LTX-315 from Lytix Biopharma for dermatological oncology and plans to submit an Investigational New Drug (IND) application in the first half of 202119 - The estimated total addressable U.S. market for molluscum is over $1 billion, affecting an estimated 6 million people21 Our Pipeline Overview of the company's product candidates and their current development phases Product Candidate Pipeline Status | Product Candidate | Indication | Pre-IND | Phase 2 | Phase 3 | NDA | Next Expected Milestone | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | VP-102 (YCANTH) | Molluscum Contagiosum | | | ✓ | ✓ | PDUFA Goal Date: June 23, 2021 | | | Common Warts | | ✓ | | | Evaluate potential second Phase 2 trial | | | External Genital Warts | | ✓ | | | End-of-Phase 2 meeting in Q2 2021 | | VP-103 | Plantar Warts | ✓ | | | | Initiate Phase 2 trial | | LTX-315 | Dermatological Oncology | ✓ | | | | Submit US IND during 1H 2021 | Clinical Development Program Summary of clinical trial results and development plans for lead product candidates - In two pivotal Phase 3 trials (CAMP-1 and CAMP-2), VP-102 demonstrated statistically significant complete clearance of all treatable molluscum lesions compared to placebo (46% and 54% vs. 18% and 13%, respectively; p<0.0001)4142 - The Phase 2 COVE-1 trial for common warts showed positive results, with Cohort 2 (which allowed for wart paring) achieving a 51.4% complete clearance rate at Day 8451 - Following positive topline results from the Phase 2 trial of VP-102 for external genital warts in November 2020, the company requested an end-of-Phase 2 meeting with the FDA in Q1 20212754 - The company is developing VP-103 for plantar warts and LTX-315 for dermatological oncology, with plans to initiate a Phase 2 trial for VP-103 and submit an IND for LTX-315 in the first half of 2021282958 Manufacturing Reliance on third-party manufacturers and a single-source supplier for key raw materials - Verrica does not own manufacturing facilities and relies on third-party contractors for the manufacture of its product candidates59 - The company has a five-year supply agreement with a Chinese supplier for naturally-sourced cantharidin, which grants Verrica exclusivity for the raw material in North America6062 - As of January 31, 2021, the company possessed sufficient raw cantharidin and API to produce over 14 million finished drug product applicators61 Commercialization Plans for U.S. sales force and anticipated market access for VP-102 - The company plans to build a specialized U.S. sales force of approximately 50 to 60 representatives to target dermatologists and pediatricians67 - A market research study surveying payors representing over 105 million lives indicated that, given the unmet need, the majority of patients would likely have access to VP-102 with minimal restrictions if approved68 Competition Competitive landscape for molluscum and warts, including existing and pipeline therapies - There are currently no FDA-approved prescription therapies for molluscum, common warts, or plantar warts; competition includes off-label therapies, cryotherapy, curettage, and compounded cantharidin70 - If VP-102 is approved, compounding of similar cantharidin products may be restricted under FDCA Sections 503A and 503B, though exceptions for individual patient needs could still allow for competition70 - Several other companies are developing potential treatments for molluscum (Veloce Biopharma, Leo Pharma, Novan) and common warts (Aclaris Therapeutics)72 Intellectual Property Overview of patent portfolio, licensing agreements, and associated financial terms - The company's patent portfolio covers cantharidin formulations, applicator devices, and methods of use, but not the cantharidin molecule itself; utility patents from pending applications are projected to expire between 2034 and 20417475 - Verrica obtained an exclusive worldwide license from Lytix Biopharma for LTX-315, with financial terms including upfront/milestone payments of $2.5 million, up to $111.0 million in future milestones, and tiered royalties7980 - The company granted Torii Pharmaceutical an exclusive license for cantharidin-based products in Japan, for which Verrica will receive an $11.5 million upfront payment, up to $58.0 million in milestones, and tiered transfer price payments8385 Government Regulation and Product Approval Regulatory framework for drug-device combination products and compliance with healthcare laws - VP-102 is regulated as a drug-device combination product, requiring review coordination between the FDA's Center for Drug Evaluation and Research (CDER) and Center for Devices and Radiological Health (CDRH)90 - The company may be entitled to five years of non-patent exclusivity if VP-102's active ingredient is characterized as a New Chemical Entity (NCE), with a potential six-month pediatric extension113 - The business is subject to extensive healthcare laws, including the federal Anti-Kickback Statute, False Claims Act, HIPAA, and the Physician Payments Sunshine Act, which govern interactions with healthcare providers and payors128129134136 - The Affordable Care Act (ACA) and other healthcare reform initiatives continue to create an uncertain environment regarding drug pricing, reimbursement, and market access146147 Risk Factors The company faces substantial financial, operational, and regulatory risks, including significant losses, capital needs, reliance on VP-102 approval, supply chain dependencies, and intense competition Risks Related to Financial Position and Capital Needs Significant historical losses, limited cash runway, and debt covenants pose financial challenges - The company has a history of significant losses, with a net loss of $42.7 million in 2020 and an accumulated deficit of $103.9 million as of December 31, 2020; it has never generated revenue and expects to incur losses for the next several years168 - Existing cash is expected to fund operations only through the first quarter of 2022, and substantial additional funding will be required to meet objectives176180 - The company has $40.0 million in debt with restrictive covenants, including a minimum liquidity requirement that it may not be able to meet without additional financing, which could lead to debt acceleration187188190 Risks Related to Product Development Uncertainty and complexity of clinical trials and regulatory approval for drug-device combination products - The company's business is highly dependent on the successful development, regulatory approval, and commercialization of its lead product candidate, VP-102191 - Clinical development is a lengthy, expensive, and uncertain process; delays in trials, patient enrollment difficulties, or unfavorable results could prevent or delay marketing approval195199203 - VP-102 is a drug-device combination product, which may result in a more complex and lengthy regulatory review process due to the need for coordination between different FDA centers218 Risks Related to Commercialization Challenges in market acceptance, competition from existing therapies, and securing adequate reimbursement - Even if approved, VP-102 may fail to achieve market acceptance from physicians, patients, and payors232 - The company faces substantial competition from existing treatments, off-label products, and compounded cantharidin, which may still be available under certain conditions even after VP-102's approval238240 - Commercial success is highly dependent on obtaining adequate coverage and reimbursement from third-party payors, which is uncertain and may be difficult to secure251 Risks Related to Dependence on Third Parties Reliance on single-source suppliers and contract organizations introduces supply chain and operational risks - The company relies on a single supplier based in the People's Republic of China for its raw material, naturally-sourced cantharidin, posing significant supply chain, environmental, and geopolitical risks273276 - The COVID-19 pandemic has already caused delays in planned clinical trials for common warts and plantar warts and could continue to adversely impact the business279 - Verrica relies on third-party contract manufacturers for its products and CROs for its clinical trials, which reduces direct control over these critical functions and introduces risks related to performance, compliance, and cost266282 Risks Related to Intellectual Property Limited patent protection for the active ingredient and potential for costly intellectual property litigation - The active ingredient, cantharidin, is a naturally occurring compound and its composition of matter is not patentable; patent protection is limited to specific formulations, devices, and methods of use, which may allow competitors to develop non-infringing alternatives315 - The company may become involved in expensive and time-consuming lawsuits to protect its patents or defend against claims that it is infringing on the intellectual property rights of others317321 Risks Related to Legal and Regulatory Compliance Matters Extensive healthcare laws, promotion regulations, and evolving pricing scrutiny pose compliance and market access risks - The company's business is subject to extensive federal and state healthcare laws, including anti-kickback, false claims, and privacy regulations; violations can lead to substantial penalties332 - The FDA strictly regulates the promotion of prescription products, and any improper promotion of off-label uses could result in significant liability338 - Ongoing healthcare reform and heightened scrutiny of pharmaceutical pricing create an uncertain regulatory environment that could negatively impact the company's ability to profitably sell its products344349 Risks Related to Employee Matters and Managing Our Growth Dependence on key personnel and challenges in managing organizational expansion - The company is highly dependent on its key executives and scientific personnel and faces intense competition in recruiting and retaining qualified individuals355356 - Expected expansion of operations and employee headcount may create difficulties in managing growth effectively357 Risks Related to Ownership of Common Stock Stock price volatility, concentrated ownership, and reduced disclosure as an emerging growth company - The company's stock price may be volatile, and a substantial portion of its common stock is concentrated among executive officers, directors, and principal stockholders, which may limit the influence of other stockholders360369 - As an "emerging growth company," Verrica is permitted to have reduced disclosure and governance requirements, which may make its stock less attractive to some investors371 - A material weakness in IT general controls was identified in 2019 and remediated as of December 31, 2020377599 Properties The company leases office space in West Chester, Pennsylvania; it entered into a new seven-year lease for 11,201 square feet of office space to serve as its new headquarters, with the lease commencing on September 1, 2020 - The company entered into a new seven-year lease for 11,201 square feet of office space in West Chester, PA, which commenced on September 1, 2020, to serve as its new headquarters393 Legal Proceedings A putative class action lawsuit filed against the company and certain executive officers in July 2020, alleging federal securities law violations, was voluntarily dismissed by the plaintiff in December 2020 - A putative class action complaint filed against the company on July 14, 2020, was voluntarily dismissed with prejudice as to the plaintiff on December 21, 2020395 PART II Financial performance, capital resources, and market information for the company's common equity Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Verrica's common stock trades on the Nasdaq Global Select Market under the symbol "VRCA"; the company has never paid cash dividends and does not plan to in the foreseeable future, partly due to restrictions in its loan agreements; in December 2020, the company repurchased 424,429 shares of its common stock from a former executive - The company has never declared or paid cash dividends and does not anticipate doing so; its loan agreements also restrict dividend payments399 - In December 2020, the company repurchased 424,429 shares of common stock from its former Chief Scientific Officer at a price of $0.0001714 per share404 Management's Discussion and Analysis of Financial Condition and Results of Operations Verrica reported a net loss of $42.7 million for 2020, an increase from $28.2 million in 2019, driven by higher G&A expenses related to stock-based compensation and pre-commercial activities for VP-102; the company ended 2020 with $65.5 million in cash, cash equivalents, and marketable securities; it secured a debt facility in March 2020, drawing $35.0 million; management believes existing cash, combined with an $11.5 million upfront payment from its Torii collaboration, will fund operations at least through the first quarter of 2022, but notes it is probable the company will not meet a minimum liquidity covenant on its debt without additional financing Results of Operations Analysis of operating expenses and net loss for the fiscal year 2020 compared to 2019 Results of Operations (in thousands) | | For the Year Ended December 31, | Change | | :--- | :--- | :--- | :--- | | | 2020 | 2019 | ($) | | Operating expenses: | | | | | Research and development | $15,673 | $15,436 | $237 | | General and administrative | $24,508 | $14,644 | $9,864 | | Total operating expenses | $40,181 | $30,080 | $10,101 | | Loss from operations | ($40,181) | ($30,080) | ($10,101) | | Interest income | $521 | $1,877 | ($1,356) | | Interest expense | ($3,033) | $— | ($3,033) | | Net loss | ($42,694) | ($28,207) | ($14,487) | - General and administrative expenses increased by $9.9 million in 2020, primarily due to higher stock-based compensation costs (including a $4.8 million modification expense), increased headcount, and pre-commercial activities for VP-102440 - Research and development expenses remained relatively flat, increasing by $0.2 million to $15.7 million in 2020439 Liquidity and Capital Resources Overview of cash position, debt obligations, and future funding requirements - As of December 31, 2020, the company had $65.5 million in cash, cash equivalents, and marketable securities446 - In March 2020, the company entered into a loan agreement and borrowed $35.0 million in term loans; an additional $5.0 million was borrowed on March 1, 2021447448 - The loan agreement contains a minimum liquidity covenant; the company has classified the entire debt as a current liability because it believes it is probable that it will not be in compliance with this covenant at some point in the next twelve months without additional financing458 Cash Flow Summary (in thousands) | | For the Year Ended December 31, | | :--- | :--- | :--- | | | 2020 | 2019 | | Net cash used in operating activities | ($30,207) | ($27,408) | | Net cash (used in) provided by investing activities | ($3,580) | $25,955 | | Net cash provided by financing activities | $35,232 | $423 | Financial Statements and Supplementary Data This section contains the company's audited financial statements for the fiscal years ended December 31, 2020 and 2019, as audited by KPMG LLP; key financial data includes a net loss of $42.7 million for 2020, total assets of $74.2 million, and total liabilities of $41.2 million as of year-end 2020; the accompanying notes detail significant accounting policies, debt obligations, stock-based compensation, and recent collaboration agreements Financial Statements Summary of key financial data from the balance sheet and statement of operations Key Financial Data (as of and for the year ended Dec 31, 2020, in thousands) | Metric | Amount | | :--- | :--- | | Balance Sheet: | | | Cash and cash equivalents | $10,686 | | Total assets | $74,154 | | Current debt, net | $35,315 | | Total liabilities | $41,168 | | Total stockholders' equity | $32,986 | | Statement of Operations: | | | Total operating expenses | $40,181 | | Net loss | ($42,694) | | Net loss per share | ($1.71) | Notes to Financial Statements Details on debt covenants, stock-based compensation, and significant collaboration agreements - The company's debt agreement includes a minimum liquidity covenant; management believes it is probable this covenant will not be met in the next twelve months without additional financing, leading to the classification of all outstanding debt as a current liability502578 - In December 2020, an agreement with the former Chief Scientific Officer was modified, resulting in the immediate recognition of $4.8 million in stock-based compensation expense559 - In March 2021, the company entered into a collaboration and license agreement with Torii Pharmaceutical, which includes an $11.5 million upfront payment and up to $58 million in potential milestones588589 - In August 2020, the company entered into an exclusive license agreement with Lytix Biopharma, paying a $0.3 million upfront fee and committing to potential future milestones of up to $111.0 million plus royalties591 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020; a material weakness in information technology (IT) general controls related to segregation of duties, which was identified in 2019, was successfully remediated during 2020 - A material weakness in IT general controls, first disclosed in the 2019 Form 10-K, was remediated as of December 31, 2020598599 - The remediation plan involved transferring key administrative access for an IT system to a third-party IT vendor599602 - Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2020594 PART III Information on corporate governance, executive compensation, and security ownership Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - The information required by this item is incorporated by reference from the company's 2021 Proxy Statement607 Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - The information required by this item is incorporated by reference from the company's 2021 Proxy Statement607 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - The information required by this item is incorporated by reference from the company's 2021 Proxy Statement608 Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - The information required by this item is incorporated by reference from the company's 2021 Proxy Statement608 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - The information required by this item is incorporated by reference from the company's 2021 Proxy Statement609 PART IV Listing of exhibits and financial statement schedules filed with the annual report Exhibits and Financial Statement Schedules This section lists the exhibits filed as part of the Annual Report, including corporate governance documents, material contracts such as loan agreements and license agreements, and certifications required by the Sarbanes-Oxley Act - This section contains a list of all exhibits filed with the Form 10-K, including the company's certificate of incorporation, bylaws, material contracts, and required certifications610611