Verrica Pharmaceuticals Should Receive Another CRL Today

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Summary

  • FDA re-inspected CMO in February 2022 and issued new Form 483.
  • CMO has failed each of three inspections in four years.
  • Corrective actions will take significant time.

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Less than three months after Verrica Pharmaceuticals (NASDAQ:VRCA) re-submitted its NDA, the FDA has re-inspected their contract manufacturing organization ("CMO") between February 7-18 2022 and issued a much harsher list of deficiencies on Form 483. These deficiencies are still outstanding, which I believe should result in an automatic CRL later today.

Background

1) VRCA has retained Sterling Pharma Services as their CMO, a company that primarily produces OTC, animal and homeopathic products. Sterling began attempting to manufacture sterile liquids in 2018. According to the FDA's 2021 Establishment Inspection Report ("EIR") 2022-277_Sterling_Pharmaceutical_Service_Duplo_IL_EIR_dated_051421_Redacted__003_.pdf), the CMO received its first Form 483 during their first-ever inspection in 2018, when the firm did not even have SOPs established on how to make cGMP products, data integrity, and other basics. Never mind, having an actual manufacturing process in place for prescription drugs:

-"There are no written procedures for production and process controls designed to assure that the drug products have the identity, strength, quality and purity they purport or are represented to possess. "

-"Laboratory controls do not include the establishment of scientifically sound and appropriate specifications, standards, sampling plans and test procedures designed to assure that components, drug product containers, closures, in-process materials, labeling and drug products conform to appropriate standards of identity, strength, quality and purity."

-"Lack of SOPs to include data integrity controls for both the laboratory and production environments (if applicable)" Etc.

2) The FDA inspected the facility again in May 2021, when it issued the Form 483 observations leading to VRCA's first CRL. Three years later, the FDA found the same basic issues with the plant:

-Procedures designed to prevent microbiological contamination of drugs purported to be sterile are not established and not followed

-Written records of unexplained discrepancies and failures are deficient

-Responsibilities of quality control unit not in writing and not always followed

I believe these types of observations reflect a lack of basic understanding of cGMP requirements from process validation, management and quality control. In its September 20, 2021 press release VRCA stated that the CMO promised to resolve these deficiencies in "30 business days." Anyone familiar with CMC understands the FDA hadn't been pointing out simple lacks in documentation for the prior three years, but a complete lack of cGMP processes. These processes need to be documented, created, validated, executed, deviations handled correctly and quality controlled. It appears Sterling has simply not been able to do any of this.

Current Situation

Even though VRCA states in its 10-K and 10-Q "with the satisfactory resolution of the facility inspection" they resubmitted the NDA in November 2021, the FDA came to re-inspect the plant less than three months after the resubmission and issued a new Form 483 on February 18, 2022.

Why did the FDA reinspect if everything was supposed to be satisfactory? I believe VRCA is not clear on FDA's CMC regulatory process. Just because an FDA inspection has been closed and classified as VAI (and a facility w/VAI designation is not blocked from new drug approvals) that does not mean that the deficiencies have been resolved to the FDA's satisfaction. The FDA does not formally close out 483 Observations similarly to closing out a Warning Letter or downgrading an OAI classification.

Also, I do not know why VRCA chose not to disclose in its SEC filings the receipt of the Form 483 from February 18, 2022. Even if one were to think that VRCA wasn't curious enough about the results of the inspection to ask the CMO in 2021, and they believed that the FDA had some kind of responsibility to notify sponsors about inspections of manufacturers (as they stated in their Sept 2021 press release), certainly the second time around they should have been a lot more curious. I mean, I was curious enough, and able, to obtain the current 483 within days.

The Form 483 the FDA issued in February is rather harsh. It lists specific issues with basic process validation, sterility and even operator incompetence (which was a theme since 2018). I would not be surprised if the facility finally gets an OAI classification due to Sterling's inability to create basic cGMP processes over a four-year period. Certainly, VRCA should understand by now that there are no quick "30 business day" fixes for this facility.

The Future

In my opinion, Sterling doesn't have the expertise, and likely the financial resources, to create a cGMP production process to produce sterile liquid prescription drugs to FDA's standards. The CEO's (Robert T Flynn) only relevant work experience includes managing manufacturing for Impax Labs for 2.5 years, some 16 years ago. Since 2006, the current CEO has been working in this family-owned business for his father (Robert G Flynn) and took over leadership in 2019, when his father retired. As the string of three FDA inspections reveals, he does not seem to have a lot of experience with sterile liquid manufacturing.

VRCA either needs to hire consultants who can ensure that whatever work Sterling does in the future is adequate, or they need to find a different manufacturer that's able to produce VP-102 properly. Either process should take at least a year to execute before VRCA can re-file its NDA with confidence.

Valuation

VRCA has about $2/share in cash and they are burning about $1/share per year. They'll need to raise money to fund the burn while manufacturing is fixed and then raise more money to launch the product. In this market, I don't know how the stock will trade.

Risks

As with any PDUFA date, there is always a chance that the FDA decides to approve VP-102 anyway. While there are some listed Put options available on VRCA, it does not seem possible to accumulate enough for a meaningful position.

This article was written by

TripleGate profile picture
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I am a hedge fund manager focused on healthcare stocks.I started my career almost 20 years ago as an investment banker. After a stint in private equity, I ended up working as an analyst at a large and prominent hedge fund. I am known in the industry for creative and in-depth due diligence.  When I left to start my own fund, I had the privilege of receiving part of my start-up capital from one of the legends of the hedge fund industry.
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Disclosure: I/we have a beneficial short position in the shares of VRCA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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