Verrica Pharmaceuticals: The fundamentals aren’t so clear, but the stock chart can tell us something (NASDAQ: VRCA)
Verrica Pharmaceuticals (NASDAQ: VRCA) is a biotech focused on two very common indications in dermatology: molluscum contagiosum and warts. Molluscum contagiosum is a viral skin infection that leads to the development of small, painless bumps. The bumps can spread from person to person through direct contact and, if scratched, can spread to other parts of the surrounding skin. Depending on the location of the bumps, a patient may opt for cryogenic surgery, laser surgery, or off-label medications, but if left untreated, the bumps usually go away on their own within a month. year.
As you can see in the slide below, the pooled efficacy data from the Phase 3 CAMP-1 and CAMP-2 trials show that YCANTH (formerly called VP-102) has clear clinical benefit.
CAMP-1 and CAMP-2 phase 3 pooled data for molluscum contagiosum
Source: June 2020 presentation (slide 18)
The prevalence in the United States for this indication is approximately 6 million, but only 900,000 are diagnosed each year (June 2020 presentation, slide 6). Management believes that the first FDA-approved treatment specifically for molluscum contagiosum would dramatically expand the addressable treatment market, forcing many currently untreated patients to seek treatment.
Like some of the other Seeking Alpha articles and reviews that point out, we are of the opinion that the need for this drug is not so clear. Many patients probably don’t seek treatment because the bumps pose no threat to their health, and many simply choose to wait for them to go away on their own.
This lack of health risk is not a convincing thesis. Nonetheless, HC Wainwright has projected maximum net sales of $400 million (for molluscum contagiosum only), which seems like a lot, given the lack of pricing power VRCA will have. HC Wainwright’s estimate for the warts indication is $220 million (VP-102 is also being tested for warts and has shown clinical benefit), but we also find that hard to fully believe for similar reasons , given the rather benign nature of warts. With a market cap of just $174 million, to believe that these two peak net sales estimates would imply a lot of upside. In this article, we take no position for or against these estimates of future business success.
However, we believe VRCA is an example of a stock worth a small bet, even if the underlying long-term fundamentals are not so clear cut.
5 year stock chart
Source: Alpha Research
Looking at the 5-year stock chart, we see that VRCA traded steadily around $15/share for several months in 2019 and 2020 before crashing during the COVID-19 selloff. It then rallied back to $15/share, likely in anticipation of the upcoming YCANTH PDUFA date, which was July 13.
The stock then fell after the market closed on June 29, when it was revealed that the FDA had sent the VRCA a letter regarding the YCANTH NDA. The letter stated that “there are gaps that preclude discussing labeling and post-marketing requirements/commitments at this time.” The letter did not cite any specific deficiencies, but the company noted that previous FDA requests during the NDA review process had focused on CMC (chemistry, manufacturing and controls) issues.
The CRL officially arrived on July 14 before the market opened, and the rejection was actually due to the FDA seeking additional information regarding certain aspects of the CMC process, as well as human factors validation. These types of issues are generally easy to resolve, so as no clinical safety or effectiveness issues have been identified, we believe YCANTH will eventually be approved.
We think the drop below $7/share can be an attractive investment opportunity. If we take past stock prices as an indication of what investors think the company is worth, then twice investors thought this company was worth around $15/share.
Since trading at this value, there have been no changes in the efficacy or safety data of their drug pipeline. For this reason, we believe that the decline was excessive, purely from a qualitative point of view. Additionally, the risk of dilution at this stage appears low (as of June 30, they had $80 million in cash, which they believe should fund operations through 4Q21).
Again, we are agnostic on the long-term business prospects of molloscum contagiosum and warts indications and can only say that the estimates of other professionals deserve careful consideration. If your investment strategy requires this type of analysis, we refer you to other authors and to your own homework. On the other hand, if your portfolio strategy allows for the occasional bet due to the value attributed by the market, we believe that YCANTH will eventually be approved, and this approval could send the stock back towards $15/share.
We think VRCA is a small tactical buy.