Restrictive Payer Policies Will Limit Dermatology Revenues But Spur Recovery

Key Takeaways

• Heightened reimbursement restrictions and regulatory scrutiny may limit market expansion and erode pricing power, increasing revenue and margin volatility.
  
• Heavy dependence on a single key product, combined with funding pressures and pipeline delays, threatens long-term earnings growth and financial stability.
  
• High dependence on a single product, ongoing financial strain, and regulatory pressures threaten revenue stability, market growth, and long-term profitability.

Catalysts

A dermatology therapeutics company, engages in the development and sale of medications for the treatment of skin diseases in the United States.

• While Verrica has demonstrated robust adoption of YCANTH and is expanding its commercial footprint into new territories, increasing payer controls and health system focus on restricting reimbursement for non-essential or in-office dermatologic treatments could limit long-term addressable market size and put downward pressure on revenue growth.
  
• Although recent progress with Torii Pharmaceuticals has enabled nondilutive funding and the pathway to additional milestone payments, future revenue and cash flow will remain exposed to heightened regulatory scrutiny on drug pricing, which could erode pricing power and compress net margins as policy evolves.
  
• Despite the steady expansion of insurance coverage, particularly with Medicaid and commercial payers for YCANTH, broader trends toward healthcare spending efficiency may result in tighter formularies or coverage restrictions, raising the risk of future revenue volatility.
  
• While Verrica's pipeline advancement and strategic partnerships present a potential path to high-margin recurring revenues, ongoing dependence on a single major commercial asset and delays in approvals for new indications or pipeline products could lead to stagnating top-line growth and exposure to competition in dermatology, affecting long-term earnings stability.
  
• Even as greater public interest in dermatological health and the aging population offer a secular tailwind, persistent operating losses and low cash reserves force reliance on incoming milestone payments and possible future dilutive equity raises, which could undermine improvements in net income and shareholder value.

Verrica Pharmaceuticals Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Verrica Pharmaceuticals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Verrica Pharmaceuticals's revenue will grow by 101.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Verrica Pharmaceuticals will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Verrica Pharmaceuticals's profit margin will increase from -330.5% to the average US Pharmaceuticals industry of 23.2% in 3 years.
• If Verrica Pharmaceuticals's profit margin were to converge on the industry average, you could expect earnings to reach $28.0 million (and earnings per share of $2.54) by about August 2028, up from $-48.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Pharmaceuticals industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Verrica Pharmaceuticals Future Earnings Per Share Growth

Risks

• Verrica's heavy reliance on YCANTH as its core commercial product creates significant revenue concentration risk, meaning any competitive, regulatory, or safety-related setbacks for YCANTH could result in sharp declines in overall revenue and earnings.
  
• Increased utilization of the co-pay assistance program and pricing discounts may erode net realized pricing for YCANTH as payer controls intensify, impacting gross and net margins over time, especially as pressure to contain specialty pharmaceutical costs increases.
  
• Continuing operating losses and a cash balance that, under GAAP, is not sufficient to fund operations for the next year without external nondilutive or dilutive funding underscore an ongoing risk of shareholder dilution or financial strain, negatively affecting long-term earnings per share and balance sheet quality.
  
• Delays or failures in advancing late-stage pipeline products (such as VP-315 for basal cell carcinoma) or in achieving new regulatory approvals for label expansion could limit future top-line growth and keep research and development costs elevated without offsetting revenue, reducing future profitability.
  
• Broader regulatory and payer trends toward restricting reimbursement or imposing tighter controls on non-essential or cosmetic dermatological treatments, combined with potential shifts in care delivery models such as telemedicine, could limit the addressable market for YCANTH and future pipeline assets, constraining revenue growth and dampening long-term earnings potential.

Valuation

• The assumed bearish price target for Verrica Pharmaceuticals is $20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Verrica Pharmaceuticals's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $120.6 million, earnings will come to $28.0 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $5.96, the bearish analyst price target of $20.0 is 70.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.