The market is buzzing about Journey Medical (DERM) and its upcoming DFD-29 launch. Touted as a potential best-in-class treatment for rosacea, DFD-29 boasts impressive Phase 3 trial results, showing statistical superiority over both placebo and the current market leader, Oracea. With the potential for an erythema indication and a robust patent profile extending to 2039, DFD-29 appears poised to reshape the rosacea landscape and bring significant value to Journey Medical.

But hidden within the Q1 2024 earnings transcript lies a revelation that has flown under the radar – a subtle shift in Journey Medical's core business profitability that even seasoned analysts haven't fully grasped. This overlooked transformation could have profound implications for the company's valuation and its ability to leverage the DFD-29 launch for exponential growth.

Journey Medical’s Q1 2024 revenue increased by 7% year-over-year, reaching $13 million. This growth was propelled by a 24% surge in revenue from Qbrexza and Accutane, which together reached $10.8 million compared to $8.7 million in Q1 2023. While this top-line growth is impressive, the true story lies in the dramatic efficiency gains Journey Medical has achieved.

The company’s strategic pivot, initiated in 2023, involved a significant reduction in SG&A expenses to pave the path to profitability. The success of this strategy is evident in the Q1 2024 results. Remarkably, Journey Medical achieved 7% revenue growth and profitability in its base business with only 35 sales territories, compared to 59 territories in Q1 2023.

This seemingly minor detail highlights an astonishing increase in operational efficiency. With fewer territories, Journey Medical is generating more revenue and achieving profitability with significantly lower SG&A expenses. This points to a fundamental shift in the company's ability to leverage its existing infrastructure for greater profitability.

Journey Medical’s CEO, Claude Maraoui, stated that the revenues generated from their four core commercial brands (Qbrexza, Accutane, Amzeeq, and Zilxi) now surpass their SG&A expenses. This remarkable achievement indicates that the core business is inherently profitable, excluding one-time events like the DFD-29 NDA filing fee.

The potential for even greater profitability is evident as Journey Medical anticipates continued growth from its core brands throughout 2024. The company also expects to benefit from further incremental expense reductions, driven by the cost optimization efforts implemented in 2023.

Here's the key takeaway that most analysts haven't fully recognized: Journey Medical isn't merely on the cusp of profitability; it's demonstrating a sustained and increasingly profitable core business. This enhanced profitability profile will be a powerful engine for leveraging the upcoming DFD-29 launch.

Consider this hypothesis: If Journey Medical's core business can achieve a 7% revenue growth rate with a significantly reduced sales force, imagine the potential with a successful DFD-29 launch. The addition of a blockbuster drug like DFD-29 to their existing portfolio could lead to a synergistic expansion, where the increased revenue scales on an already profitable base, yielding disproportionately higher profits.

Furthermore, Journey Medical's business development strategy, focused on out-licensing intellectual property and acquiring commercially available dermatology products, will further enhance this profitability engine. Each new product integrated into their streamlined and efficient infrastructure has the potential to generate significant contributions to the bottom line.

Revenue Growth: Q1 2023 vs. Q1 2024

Reference: Journey Medical Q1 2024 Earnings Transcript

The market has understandably fixated on the transformative potential of DFD-29. But the overlooked reality is that Journey Medical's core business has quietly undergone a profound transformation, evolving into a lean, efficient, and highly profitable operation. This hidden profitability play sets the stage for explosive growth, fueled by the anticipated DFD-29 launch and a shrewd business development strategy. Journey Medical is not just a rosacea revolution in the making; it's a compelling investment story built on a foundation of overlooked and underappreciated profitability.

"Fun Fact: Rosacea affects an estimated 16 million people in the United States alone, highlighting the significant need for effective treatments like DFD-29."