Elle Investments Research Report: VRCA

 

Company: Verrica Pharmaceuticals

Symbol: VRCA

Analysis Date: 7/30/20

Analysis Price: $6.92

Price Target (PT): $15.00

Upside: 117%

Dividend: NA

Recommendation: Buy

 

VRCA: 1-Year Chart

Source: Seeking Alpha

INVESTMENT THESIS:

VRCA dropped off sharply from $15.00/share when the YCANTH CRL was announced. We have no opinion on YCANTH’s commercial prospects in the areas of molloscum contagiosum and warts. However, the company’s stock has twice hit $15.00/share in the past few months. If you believe that the prior trading levels are a reflection of intrinsic value, then a small position is justified. We think VRCA is a Buy.

 

LIQUIDITY POSITION: Adequate

As of June 30, VRCA had cash on hand of $80M. Management says this should fund operations through 4Q21.

COMMERCIAL PROSPECTS: No opinion

VRCA is a biotech focused on two very common dermatology indications: molloscum contagiosum and warts. Molluscum contagiosum is a viral skin infection that leads to the development of small, painless bumps. These bumps can spread to other people via direct contact, but they are benign. To remove the bumps, patients can decide to undergo cryogenic surgery, laser surgery, or off-label drugs. However, if left untreated, they usually go away on their own within a year’s time.

In the US, about 6M people have molluscum contagiosum, but only about 900k are diagnosed each year. VRCA management thinks that having an FDA-approved drug for this specific indication would be the impetus for many currently untreated patients to seek treatment. Thus far, YCANTH has shown a clinical benefit.

H.C. Wainwright has projected YCANTH peak net sales of $400M for molluscum contagiosum only, and $220M for the warts indication. Another candidate, VP-102, has also shown a clinical benefit for warts. With the low market cap being what it is, if you believe these peak net sales estimates, then the stock would seem very undervalued.

On June 29, the stock crashed when it was announced that the FDA had sent VRCA a letter relating to the YCANTH NDA. The letter stated that “there are deficiencies that preclude discussion of labeling and post-marketing requirements/commitments at this time.” No specific deficiencies were mentioned, but VRCA commented that previous requests from the FDA during the NDA review process had focused on CMC issues (Chemistry, Manufacturing, and Controls).

The official CRL came on July 14 before the market opened, and the rejection was in fact due to the FDA seeking additional information regarding certain aspects of the CMC process. The FDA also requested Human Factors validation. It is our experience that these types of issues are usually easily resolved, since no clinical safety or efficacy issues have been identified. Because of this, we think that YCANTH will eventually be approved.

However, we offer no opinion on the likelihood of commercial success for YCANTH or VP-102. Both molloscum contagiosum and warts are fairly common yet harmless conditions, and so we are not certain of whether the commercial demand is really there or not.

CONCLUSION:

Every once in awhile, we come across a stock that we think deserves a small position purely based on the past price movements. VRCA is such a stock. Their candidates YCANTH and VP-102 have shown a clinical benefit in molloscum contagiosum and warts. But it’s not clear to us whether the commercial demand exists or not for such common yet benign skin conditions. Still, we think the fact that the stock twice touched $15.00/share in the recent past is a good enough reason to place a small bet on this name. We think VRCA is a Buy.

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Published By: Elle Investments Research Team

Phone: (914) 715-8066

Email: info@elle-investments.com

Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamental Analysis, is sized as part of a larger quantitative portfolio. The commentary presented here is for research purposes only and is not to be taken as investment advice. Readers are expected to perform their own due diligence and/or hire an investment professional prior to entering/exiting positions. Published research ideas are related to the specific market price and publicly available information at the time of research submission/publication. Elle Investments will enter/exit positions without notice.