Journey Medical Corporation: Why It Might Be Worth Having A Skin In This Game

This is the author's opinion only, not financial or medical advice, and is intended for entertainment purposes only. The author holds a beneficial long position in Journey Medical Corp. (DERM) and Verona Pharma (VRNA). The author receives no compensation for writing this article and has no business relationship with any of the companies mentioned.

In the last update of the Innovation & Freedom Portfolio, I wrote that I prefer to invest in small pharmaceutical companies developing conventional drugs rather than hyped biotech start-ups promising the next breakthrough. With Verona Pharma (VRNA), I was right, as the potential of the new COPD drug ensifentrine was appreciated by the market, and the stock has gained more than 140% since I added it to the I&F Portfolio (external link: Snowball Analytics). On the other hand, yesterday, January 24, I was still down about 18% on Journey Medical (DERM), but I added to my position. Below I will explain why I am still bullish on Journey Medical, but also why it is a high-risk investment.

Journey Medical Corporation is a dermatology focused pharmaceutical company based in Scottsdale, Arizona that was founded in 2014 and went public in 2021. Its founding parent, Fortress Biotech, is still a major owner of the company (47.6% as of September 30, 2024). Despite having several drugs on the market, including topical minocycline foam for acne (Amzeeq®) and glycopyrronium cloths for axillary hyperhidrosis (QBrexza®), Journey Medical's sales are stagnating. Annual revenue in 2023 was $79 million, but this included an upfront payment from Maruho for exclusive rights to QBrexza in Asia. Journey Medical provides 2024 sales guidance of $55-60 million, so with a market cap of around $86 million, Journey Medical is valued at just under 1.5x sales.

However, I don't see much upside in the drugs that Journey has already commercialized. In my opinion, Journey Medical's future success depends on the performance of Emrosi™ (minocycline hydrochloride extended release, 40mg). Emrosi, formerly DFD-29, was approved by the FDA on November 4, 2024 for the treatment of rosacea. Let me explain why I see a lot of opportunity here.

Rosacea is a chronic inflammatory skin condition that primarily affects the face. It is estimated that rosacea affects 5% of Americans (more than 16 million people in the U.S.). The condition is more common in women than men, especially those of Celtic descent, and usually begins after the age of 30. The visible lesions on the face are often perceived as disfiguring by those affected and can cause significant psychological distress.

It has long been known that the antibiotic group of tetracyclines, such as doxycycline, is effective as an oral therapy for rosacea. However, it appears that it is not the antimicrobial effect that is important, but rather the anti-inflammatory effect of these antibiotics. Two randomized phase III trials published in 2007 showed that this anti-inflammatory effect can be achieved with sub-antimicrobial doses of doxycycline and that rosacea can be effectively treated with oral sub-antimicrobial (low-dose) doxycycline.

In July 2006, CollaGenex Pharmaceuticals launched Oracea®, a low-dose formulation of doxycycline (USP, 40mg capsules), which has become the gold standard for oral rosacea treatment. CollaGenex was acquired in 2008 by privately held Swiss pharmaceutical company Galderma Pharma S.A. for $420 million. In 2023, Galderma's estimated sales of Oracea were approximately $300 million (source: Symphony PHAST prescription data according to Journey Medicals' latest investor presentation).

However, because of its excellent empirical efficacy, dermatologists have sometimes prescribed minocycline off-label. Like doxycycline, minocycline is a tetracycline and was first patented in 1961 and has been commercially available since 1971. Since Oracea was clearly a commercial success, it made sense to investigate the efficacy of minocycline for the treatment of rosacea. The Indian pharmaceutical company Dr. Reddy's Laboratories (DRL) developed DFD-29, a low-dose, extended-release formulation of minocycline with optimized efficacy for the treatment of rosacea. Before conducting its own Phase III study, DRL out-licensed global rights (excluding Brazil, Russia, India and China) to Journey Medical in June 2021. Journey Medical then conducted two randomized, parallel-group Phase III trials (MVOR-1 and MVOR-2, in the U.S. and Germany, n=653) comparing the efficacy of Emrosi (DFD-29) with Oracea and a placebo. The results were published by Journey Medical in July 2023 and showed that Emrosi was significantly superior to Oracea with placebo-like side effects: Emrosi demonstrated greater efficacy compared to Oracea and placebo as measured by Investigator's Global Assessment (IGA) at week 16 (Emrosi: 65.0% and 60.1% vs. Oracea: 46.1% and 31.4% vs. placebo: 31.2% and 26.8%). In addition, Emrosi showed a better improvement in the overall reduction in the number of inflammatory lesions than Oracea and placebo (Emrosi: -21.3 and -18.4 vs. Oracea: -15.9 and -14.9 vs. placebo: -12.2 and -11.1). The results were statistically significant at p<0.001 in both groups.

Since Emrosi has been shown to be superior to Oracea in two Phase III trials and Oracea has a $300 million market, why is Journey Medical currently valued at only $86 million? According to Journey Medical, three U.S. Orange Book patents have been issued with expected market exclusivity for Emrosi until 2039 - so expiring Orange Book patents should not be a concern.

Perhaps Wall Street is critical of the fact that Emrosi is not a novel pharmaceutical agent, but an "old", off-patent one in a new formulation with a new indication. There are low-cost, low-dose formulations of minocycline on the market that are approved for the treatment of acne (e.g., Solodyn™ 55mg minocycline extended release for about $70 on Amazon Pharmacy without insurance as of January 25, 2025). I would assume that Journey Medical will base its pricing on Oracea; a course of Oracea costs about $700 (Amazon Pharmacy, without insurance as of January 25, 2025). So, in theory, one could argue that dermatologists could prescribe off-label a cheaper formulation of minocycline, which is approved for acne, for example. However, while the active ingredient may also be minocycline, the formulation is different. One pill of Emrosi contains 10 mg immediate-release and 30 mg extended-release beads, which have been shown in two phase III studies to have optimal efficacy for the treatment of rosacea with placebo-like side effects, so in this case, minocycline is not just minocycline. And why should dermatologists take the risk of off-label prescribing when there is now an FDA-approved formulation? In addition, there are low-cost, low-dose formulations of doxycycline on the market (e.g., doxycycline 50 mg for less than $30). This has not stopped dermatologists from prescribing the much more expensive but clinically proven and FDA-approved Oracea for the treatment of rosacea over the past decade and a half. In this sense, I doubt that other cheaper formulations of minocycline that could be prescribed off-label (without proven efficacy in phase III trials) are relevant competition for Emrosi.

By the way, I mentioned Verona Pharma at the beginning, which has had an incredible run in recent months. Verona's U.S. patent for the "composition of matter" for ensifentrine expired in 2020, but the company has several patents, e.g. for the "suspension formulation" of ensifentrine, that protect the drug until at least the mid-2030s (source: Verona Pharma's latest investor presentation).

Modern medical history is full of examples of commercially successful drugs that are really just known active ingredients applied to a new indication. For example, Revatio® for pulmonary hypertension is simply a different formulation of the active ingredient in Viagra, sildenafil. In such cases, discussions about drug prices often flare up, but the approval of known active ingredients for new indications is also a risky venture for pharmaceutical companies. The approval of Emrosi required expensive clinical trials, without which we would not have sufficient evidence of its efficacy in rosacea. It is only fair that those who take the risk of such research, as in this case Journey Medical, should ultimately be rewarded.

The commercial success of Emrosi also depends on its acceptance by dermatologists. The "Standard management options for rosacea: The 2019 update by the National Rosacea Society Expert Committee" mentions oral minocycline as an effective medication, but points out the lack of evidence from trials - evidence that we now have. It would certainly be important for the commercial success of Emrosi to be considered in the next version of such guidelines.

Another key success factor for Emrosi will be its positioning on the preferred lists of pharmacy benefit managers (PBMs). These lists determine which drugs receive preferred reimbursement from health insurance companies. Oracea is already established on these lists (e.g. CVS Caremark® Performance Drug List - Standard Control from January 2025), which could be an obstacle for Emrosi. However, since there is strong evidence from two Phase III trials that Emrosi is significantly more effective than Oracea, Journey Medical is in a strong position to negotiate with PBMs, as insurers generally favor drugs that provide better patient outcomes, since this could ultimately save them money.

The details of the license agreement for the rights to Emrosi that Journey Medical entered into with Dr. Reddy's Laboratories (DRL) in June 2021 should also be mentioned. Under this agreement, a $15 million milestone payment from Journey Medical to DRL was due after November 4, 2024 as a result of FDA approval. In addition, Journey Medical must pay DRL royalties of between 10% and 20% of Emrosi's net sales, up to a total of $140 million. However, based on the optimistic assumption that Emrosi could achieve annual sales of $300 million and that the Orange book patent protection will last until 2039, the payment of these royalties should be manageable.

Finally, the elephant in the room: Journey Medical had $22.5 million in cash and $46.2 million in current assets as of September 30, 2024. In the most recently reported third quarter of 2024, the company posted a loss of $2.4 million. Not to mention the $15 million milestone payment that Journey was due to DRL upon approval of Emrosi on November 4, 2024. So the company is not in a very comfortable cash position. In order to successfully launch Emrosi, Journey will need either additional funding, a capital raise and further dilution of the stock, or a partnership with a large pharmaceutical company with strong commercialization power. If it is not possible to raise new capital or find a partner, the success of Emrosi and thus of Journey Medical is highly uncertain.

However, I believe that the above risks are priced in at the current market capitalization of around $86 million. Journey Medical is certainly a high-risk investment, but one that can be very rewarding if Emrosi is successful. On January 23, 2025, Journey announced that they will host a conference call on February 5, 2025 to provide an update on the commercial launch plan for Emrosi. I am excited to see what plans the company will present there.