Executive Summary / Key Takeaways

• Verrica Pharmaceuticals is executing a strategic turnaround focused on driving adoption of its first FDA-approved product, YCANTH for molluscum contagiosum, while significantly reducing operating expenses.
• Recent financial results show modest revenue growth for YCANTH and substantial reductions in operating expenses, reflecting the impact of the commercial realignment and cost control measures implemented in late 2024.
• The company faces significant liquidity challenges, with cash expected to fund operations into Q3 2025, and substantial doubt about its ability to continue as a going concern, necessitating further financing efforts.
• Key potential value drivers include the advancement of pipeline candidates: YCANTH for common warts (global Phase 3 with Torii Pharmaceutical (4551), minimal cash impact, potential $8M milestone) and VP-315 for basal cell carcinoma (positive Phase 2 data, 97% ORR, potential paradigm shift, end-of-Phase 2 meeting expected H1 2025).
• Success hinges on accelerating YCANTH demand through improved market access (J-Code, payer allowables, expanded distribution), overcoming the residual impact of compounded cantharidin, and securing additional funding to bridge to potential pipeline catalysts and sustainable YCANTH growth.

Setting the Scene: A Dermatology Specialist's Pivot to Commercialization

Verrica Pharmaceuticals is a dermatology therapeutics company dedicated to developing and commercializing treatments for skin diseases requiring medical intervention. After years focused on research and development, the company marked a pivotal transition in July 2023 with the FDA approval of YCANTH (VP-102) for molluscum contagiosum, becoming the first and only FDA-approved treatment for this common, highly contagious viral skin infection. This approval propelled Verrica into the commercial stage, necessitating the build-out of a specialized sales organization and distribution infrastructure.

The dermatology market is diverse, with established players like AbbVie (ABBV), Johnson & Johnson (JNJ), and Pfizer (PFE) holding significant market share across various conditions, often with broad portfolios and deep pockets. Verrica, as a smaller, focused player, competes by targeting specific, often underserved, dermatological conditions with what it believes are differentiated therapies. A significant challenge in the molluscum contagiosum market, specifically, has been the historical prevalence of unlawfully compounded cantharidin products, which lack FDA approval and consistent quality control. Verrica's strategy has explicitly included efforts to address this competitive dynamic through legal and regulatory means, viewing it as crucial for patient safety and establishing a level playing field for YCANTH.

At the core of Verrica's approach is its proprietary technology platform, particularly its GMP-controlled formulation of cantharidin delivered via a unique drug-device combination applicator for YCANTH. This technology is designed for targeted, precise application, aiming to improve efficacy and safety compared to traditional methods or compounded products. While specific, quantifiable comparative data against all alternatives is not detailed, the FDA approval itself validates the safety and efficacy profile established in clinical trials. For its pipeline candidate, VP-315, an oncolytic peptide for basal cell carcinoma (BCC), the technological differentiation lies in its mechanism of action – designed for targeted delivery to stimulate the patient's immune system and destroy cancer cells. Preliminary Phase 2 data for VP-315 demonstrated a calculated objective response rate (ORR) of 97% and approximately 51% complete histological clearance, suggesting broad patient benefit and potentially superior outcomes compared to existing treatments, which often involve surgery or systemic therapies with significant side effects. These technological differentiators are intended to provide a competitive moat, enabling Verrica to command market share and potentially premium pricing in its targeted indications.

The company's strategic response to the challenges and opportunities post-YCANTH approval has been dynamic. Following the initial launch phase, Verrica undertook a significant commercial realignment in late 2024, focusing on territories with high molluscum prevalence and established insurance coverage. This strategic shift was coupled with substantial cost reductions across the organization, aiming to create a leaner, more efficient commercial entity. This turnaround plan is central to the current investment narrative, seeking to stabilize the business and drive sustainable growth for YCANTH while prudently advancing the promising pipeline assets.

The YCANTH Commercial Trajectory and Operational Realignment

The commercial launch of YCANTH in August 2023 marked Verrica's entry into the market, targeting pediatric dermatologists, dermatologists, and select pediatricians. The initial phase involved building out the sales force and establishing distribution channels. Key operational milestones achieved include securing distribution agreements with Nufactor (nationwide specialty pharmacy), Walgreens (WBA) (specialty pharmacy and community health system stores), Accredo (specialty pharmacy), and DMS Pharmaceutical (U.S. Department of Defense).

A critical factor for market access and physician adoption, particularly for buy-and-bill accounts, was securing favorable reimbursement. Verrica successfully expanded covered lives to over 200 million by the end of 2023 and 234 million by mid-2024, encompassing commercial, Medicaid, Tricare, and Federal employee plans. A major catalyst was the issuance of a permanent J-Code (J7354) by CMS, effective April 1, 2024. This simplifies billing and reimbursement, reducing the risk of errors and facilitating buy-and-bill adoption. By July 1, 2024, CMS published the Part B schedule listing YCANTH reimbursement at ASP + 6%, and by early 2025, approximately 98% of commercial lives with YCANTH coverage had formally published their allowables, making reimbursement more predictable for physicians.

Despite these access improvements, the launch faced headwinds, notably the continued presence of unlawfully compounded cantharidin. Verrica has actively pursued legal and regulatory strategies to combat this, resulting in the discontinuation of compounding by the last 503B pharmacy and several 503A pharmacies in the U.S., and a settlement with Dormer Laboratories in June 2024 to cease U.S. sales of compounded products. While these actions are significant wins for patient safety and market integrity, the company acknowledges that compounded inventory with a typical six-month dating will take time to clear from offices, impacting the pace of conversion to YCANTH. However, management has reported hearing about the lack of compounded availability and receiving inbound requests for YCANTH from providers who can no longer obtain it, suggesting these efforts are beginning to yield results.

In response to the initial launch trajectory and financial pressures, Verrica implemented a strategic realignment in late 2024. This involved a more focused commercial strategy and a significant reduction in the operating expense burn rate by approximately 50%. The goal was to increase efficiency and productivity. Management reported that Q4 2024 operating results reflected the beginning of this success, with sequential quarterly growth in YCANTH dispensed applicator units (8,654 in Q4 2024 vs. 7,706 in Q3 2024, a 12.3% increase) and a belief that distributor inventory levels had normalized, positioning demand to translate more directly into revenue in 2025. The introduction of a single applicator configuration ("one count") is also aimed at reducing acquisition costs and expanding access. Early 2025 results (Q1 2025 dispense units over 10,000, 16.7% growth over Q4 2024) further support the positive trajectory post-realignment.

The shift towards buy-and-bill is a key operational focus, offering potential economic benefits for both physicians and Verrica (lower distribution costs compared to specialty pharmacy white bag model). Early in 2024, the split was approximately 60-40 specialty pharmacy to buy-and-bill, with expectations for buy-and-bill to become the predominant channel over time as reimbursement certainty increases and offices become more comfortable with the process. The addition of a dedicated pediatric sales force is a strategic investment targeting a large segment of the molluscum patient population, with early signs of increased prescriber interest and adoption.

Financial Performance, Liquidity, and the Going Concern Challenge

Verrica's financial performance reflects its transition to a commercial company and the subsequent strategic adjustments. For the three months ended March 31, 2025, product revenue, net was $3.4 million, a modest increase from $3.2 million in the same period in 2024, indicating early traction post-realignment. Collaboration revenue, primarily from the Torii Pharmaceutical agreement, decreased significantly to $17 thousand in Q1 2025 from $594 thousand in Q1 2024, mainly due to decreased manufacturing supply needs for Torii's development activities. Total revenue for Q1 2025 was $3.4 million, down from $3.8 million in Q1 2024.

Operating expenses saw substantial reductions, reflecting the cost control measures. Selling, general and administrative expenses decreased sharply to $8.8 million in Q1 2025 from $16.3 million in Q1 2024, driven by lower commercial activity costs, including compensation, marketing, and legal fees. Research and development expenses also decreased to $2.3 million in Q1 2025 from $4.9 million in Q1 2024, primarily due to lower clinical trial costs for VP-315 and reduced regulatory/medical affairs expenses. Total operating expenses fell to $11.6 million in Q1 2025 from $22.4 million in Q1 2024.

Despite these expense reductions, Verrica continues to incur net losses. The net loss for the three months ended March 31, 2025, was $9.7 million, an improvement from the $20.3 million net loss in the same period of 2024. The accumulated deficit as of March 31, 2025, stood at $316.8 million.

Liquidity remains a critical challenge. As of March 31, 2025, Verrica had cash and cash equivalents of $29.6 million.

Cash outflows from operations were $12.7 million for the first three months of 2025. The company has a $50 million Loan Facility with OrbiMed, which requires principal payments starting January 2025 due to YCANTH revenue not meeting a specified threshold by December 31, 2024. The Credit Agreement also mandates maintaining at least $10 million in liquidity and that financial statements not have a going concern qualification. While the going concern qualification was waived for the financial statements for the year ended December 31, 2024, and the quarter ended March 31, 2025, the company explicitly stated that based on its current plan and resources, substantial doubt exists regarding its ability to continue as a going concern within one year.

Verrica believes its current cash will fund operations into the third quarter of 2025. To address the going concern doubt and fund future operations, the company plans to seek additional funding through equity offerings, debt financing/refinancings, collaborations, strategic alliances, and licensing arrangements. A significant step was the November 2024 equity offering, which generated approximately $39.6 million in net proceeds. Potential future liquidity sources include an $8 million milestone payment from Torii Pharmaceutical upon initiation of the common warts Phase 3 trial in Japan and the exercise of Series A Warrants (exercise price $1.07, expiring November 2025). However, the receipt of these funds is not certain. The company is also subject to "baby shelf rules" limiting its ability to raise funds via its S-3 registration statement until its public float exceeds $75 million.

Pipeline Catalysts: Common Warts and Basal Cell Carcinoma

Beyond YCANTH for molluscum, Verrica's pipeline holds potential significant value drivers in large dermatological markets.

The most advanced pipeline program is YCANTH for the treatment of common warts. With an estimated 22 million patients in the U.S. alone and no FDA-approved therapies, this represents a substantial unmet need. Following a Type C meeting in late 2023, Verrica achieved alignment with the FDA on the overall design components of a pivotal Phase 3 study to support an efficacy supplement for this indication. In May 2024, the company amended its agreement with Torii Pharmaceutical for a joint global Phase 3 program in common warts. Crucially, this agreement is structured such that Verrica and Torii Pharmaceutical will equally split the costs, with Torii Pharmaceutical funding Verrica's portion as an offset against future payment obligations. This funding mechanism is expected to have minimal impact on Verrica's cash position, allowing it to pursue a large registrational trial while retaining 100% U.S. commercial rights. Initiation of the global Phase 3 program is anticipated as early as mid-2025, contingent on regulatory feedback, and triggers an $8 million milestone payment from Torii Pharmaceutical upon the first patient dosed in Japan.

The second key pipeline asset is VP-315, an oncolytic peptide being developed for basal cell carcinoma (BCC), the most common form of skin cancer with approximately 3.6 million diagnoses annually in the U.S. VP-315 is positioned as a potential non-surgical alternative or neoadjuvant therapy. The company completed dosing in Part 2 of its Phase 2 study in January 2024 and reported positive preliminary top-line results in August 2024. Data showed approximately 51% of tumors treated achieved complete histological clearance and residual tumors saw approximately 71% reduction in size. A post hoc analysis revealed a calculated objective response rate (ORR) of 97%. VP-315 was reported as well tolerated, with most adverse events being mild to moderate. Verrica expects to report additional data and receive minutes from an end-of-Phase 2 meeting in the first half of 2025, which will inform the next steps for advancement into Phase 3 trials. Management views VP-315 as a potentially underappreciated asset with the ability to change the treatment paradigm for BCC, and is exploring options for its advancement, including partnerships.

Risks and Challenges

Despite the strategic realignment and pipeline potential, Verrica faces significant risks. The most immediate is the substantial doubt regarding its ability to continue as a going concern, highlighting the urgent need for additional funding. Failure to secure sufficient capital on acceptable terms would severely constrain operations, potentially forcing delays or abandonment of commercial efforts and pipeline programs.

The debt obligations under the OrbiMed Credit Agreement pose another risk. While covenants were waived for recent periods, future waivers are not guaranteed, and failure to meet the liquidity test or obtain waivers could trigger a default and acceleration of obligations.

Commercial success for YCANTH is not guaranteed. While market access and reimbursement are improving, driving consistent demand and converting physicians away from compounded products will take time and continued effort. The pace at which compounded inventory clears from the market is a key variable. Competition from other approved therapies, though currently limited, could also impact market share.

Pipeline development is inherently risky. The common warts and VP-315 programs must successfully navigate further clinical trials and regulatory reviews, which are uncertain, time-consuming, and expensive processes. Unexpected results or regulatory hurdles could delay or prevent approval. The ability to fund these programs long-term, even with strategic partnerships, depends on overall financial health and access to capital.

Litigation risks, including the securities class action and derivative lawsuit, could result in significant costs and liabilities, diverting resources and impacting the company's financial position.

Conclusion

Verrica Pharmaceuticals is at a critical juncture, executing a strategic turnaround aimed at stabilizing its commercial operations for YCANTH and unlocking the potential of its pipeline. The company has made tangible progress in establishing market access for YCANTH, streamlining reimbursement, and addressing the challenge of compounded products, while also significantly reducing its operating expense burn rate. The pipeline, particularly the common warts program with its favorable funding structure and the promising VP-315 data in BCC, represents substantial potential value drivers.

However, the path forward is challenging, overshadowed by significant liquidity constraints and the need for additional financing to support operations beyond Q3 2025 and fund future development. The success of the turnaround hinges on accelerating YCANTH demand through effective commercial execution and the continued impact of efforts against compounded products, alongside the successful advancement of pipeline candidates and the ability to secure necessary capital. Investors should closely monitor YCANTH's sales trajectory, progress on pipeline milestones (especially the common warts Phase 3 initiation and VP-315 end-of-Phase 2 feedback), and the company's ability to strengthen its balance sheet. The story of Verrica is one of potential innovation in dermatology battling the realities of commercial execution and financial sustainability.