The Friday Biotech Perspective #5

When no approved drug exists, clinical-stage drugs can flourish

The rare skin disease molluscum contagiosum (MC) strikes approximately six million people in the US annually. Similar to warts, small, painless lesions appear on the body as round, firm bumps. Unlike warts, however, the molluscum infection results from transmission of a poxvirus (MC virus) and primarily strikes children.

Though the bumps can disappear once the virus passes through the body, because children experience the condition, they are likely to scratch the bumps and transmit the virus to siblings or other children. Without treatment, MC can last for an average of 13 months, and in some cases, up to several years.

Understood to be essentially a benign condition with no specific, FDA-approved drug, physicians relied on standard infectious disease treatments for MC, expecting the virus would pass eventually. The dermatology company Verrica Pharmaceuticals (NASDAQ:VRCA) saw a different opportunity. Verrica created a single-use applicator named YCANTH that contains a low dose of the approved burn agent cantharidin. By directing the applicator to the site of the MC bump or lesion, parents could effectively contain and thwart the spread of MC. What parent would not want that option for MC?

Hidradenitis suppurativa (HS) is another skin condition without an FDA-approved treatment. In HS, lumps develop in areas where the skin touches the skin, such as the armpits and groin areas. The lesions and lumps appear to develop from inflammation and infection of the sweat glands. While corticosteroids often are used to manage HS, AbbVie Inc.’s (NASDAQ:ABBV) Humira (adalimumab) is the only approved drug treatment for HS, primarily when earlier treatments prove ineffective.

Like Verrica, MoonLake Immunotherapeutics (NASDAQ:MLTX) and Acelyrin, Inc. (NASDAQ:SLRN) seized an opportunity in HS because of the absence of effective treatment. MoonLake licensed sonelokimab from Merck KGaA (MRK.DE) after Merck had tested sonelokimab in a 300-patient psoriasis trial. MoonLake instead choose to advance sonelokimab in a phase II HS trial. After MoonLake disclosed positive topline results from a phase II trial in HS, the company’s stock doubled within days. Acelyrin’s stock climbed 35% on day after the MoonLake data release; the Acelyrin phase IIb/III data in HS, through its drug izokibep, likely will be released in the next 60 days.

It appears to be a straightforward concept: No FDA-approved treatment presents a wide-open market. However, all three companies had to develop drugs that would work effectively in MC and HS. For MoonLake and Acelyrin, the development required transforming and adapting psoriasis drugs to be effective in HS. Such adaption is common in the pharmaceutical industry but still requires scientists to learn the nuances of the new disease and companies to run the clinical trials. Over the past 20 years, large pharmaceutical companies have abandoned this adaption. Merck KGaA’s sale of sonelokimab to MoonLake is the perfect example. The setbacks in psoriasis at Merck KGaA became an upsized opportunity for MoonLake in HS as three-year-old MoonLake acquired sonelokimab in 2021. As a SPAC-listed company, MoonLake traded flat at $10 per share for about 18 months until April 2022. Now it trades at $57.57 per share.

The path to approval or clinical validation certainly is not always smooth. Verrica received two complete response letters (CRLs) for its drug-device combination. The first was delivered in July 2020 and the second in September 2021. Both of these CRLs, however, were sent to Verrica at a time when the FDA staff was overwhelmed with more pressing Covid19 commitments. Moreover, the FDA concerns involved Chemistry, Manufacturing, and Controls (CMC) processes and reported deficiencies at a facility of a contract manufacturing organization (CMO) used by the company – not from safety or efficacy concerns regarding YCANTH.

Following the approval of YCANTH on July 21, 2023, Verrica’s stock hit $7.45 per share. The company then announced a financing to commercialize YCANTH. Verrica’s stock closed August 31 at $4.55 per share.

Becoming the first FDA-drug for a specific indication, regardless of its size, will always be a bumpy road but the reward can be much richer than pursuing “me-too” drug efforts. Commercialization, as Verrica is learning, is a very different and challenging path. More opportunity for stock appreciation takes place early in the development cycle when the chance to become the first approved drug for a specific condition, regardless of the market size, is at hand.

SanaCurrents held a position in Verrica (VRCA) prior to the approval of YCANTH and currently holds a position in Acelyrin (SLRN). SanaCurrents has never held a position in MoonLake (MLTX).