Arcutis Biotherapeutics, Inc. (ARQT) Earnings Call Transcript & Summary

Welcome once again to the 19th Annual Morgan Stanley Healthcare Conference. I'm one of the biotechnology analysts here. My name is David Lebowitz. Before we get started, let me jump into the requisite disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, I'm happy to introduce in the next session from Arcutis, CEO, Frank Watanabe; CFO, Scott Burrows; CCO, Ken Lock; and CMO, Patrick Burnett.

I guess if you could start out Arcutis is late-stage dermatology company. You have one drug that already produced Phase III results and other -- some other Phase III trials that are in the works. Could you talk about the top level vision for the company and your overall mission going forward?

Sure. David, great to see you again. So we are a medical dermatology focused company looking at developing what we consider to be meaningful innovations as we characterize it. So things that really address significant concerns of doctors and their patients. As you mentioned, we've completed our Phase III in plaque psoriasis, we're getting ready to file that with the FDA very soon. And are busily preparing for a launch, hopefully sometime next year, pending FDA approval. We also continue to execute on our other programs. We've got a very large ongoing program in atopic dermatitis, we're -- I think, especially given some of the developments in the atopic dermatitis space of late, we're very excited about that opportunity. We expect to read that data out late next year. And we also have 2 ongoing Phase III studies with our foam formulation, one in seborrheic dermatitis and the other one is scalp psoriasis. So a lot going on in the clinical front as well. And we're a well-capitalized company with, I think, a little over $410,000 $410 million on the balance sheet after our last quarter results, and that gives us the resources to continue to execute as well as to invest for our commercial launch.

Thank you for that. And so let's start off with the recent Phase III data. Roflumilast cream was the study in the Phase III trial for plaque psoriasis. Could you run us through the data that was produced to this point? Why is that data attractive? And I guess, give the running of what needs to be done for the NDA?

Patrick, can you take that?

Yes. So we were very excited to see the Phase III data readout, because what we saw was that the level of IGA success was actually higher than what we had seen in Phase IIb. And actually puts us on par with the combination products which are out on the market right now, which combine a high-potency steroid with either Vitamin D or retinoid. These are kind of reformulation products, but they are achieving some of the highest response rates in topical therapy today. So sitting at around a 40% IGA success rate, that puts us in a very, very strong position. It's a nonsteroidal to have efficacy, which is on par with those of a high-potency steroid. We also saw very strong safety profile. The safety profile has been consistent across all of our different programs, very low patient discontinuation rate. And really, the only safety finding that we're seeing is diarrhea in the low -- very low 3% range of patients. And this is kind of our only indication of the PDE4 safety profile which dermatologists are already very, very familiar with from the use of Otezla in psoriasis patients as well. So based on those -- on those Phase III day, we felt that it puts us in a very strong position to put the NDA together. We had a pre-NDA meeting with the FDA, and we've moved very quickly through kind of getting the submission modules together. So we've guided that we're going to make our NDA submission.

Late this quarter, early next quarter, would be very soon.

We brought that in just a little bit based on the [ steep ] been able to get everything together.

Excellent. Now. You had mentioned that it's safety -- it's efficacy is on par with the combination products in the market. Could you outline how this particular market looks? Where specifically were roflumilast will be targeted most predominantly? And what are your chief competitors right now in that market?

Ken, do you want to take that one?

Yes, sure, David. So thanks for that. So we see roflumilast or topical roflumilast playing across the entire spectrum of severity in both gross, mild, moderate and severe patients. But very typically, topical therapy still very much dominates treatment of psoriasis. So upwards of 80%, 90% of patients are getting a topical of some sort, even if they're receiving a systemic like in [ otez ] or a biologic. So we see utility across the entire spectrum. And primarily, this is a category that has not had any innovation for a decade. So it's primarily older steroid based products or combination products as Patrick mentioned, which have lots of limitations and can't be used chronically nor across all the areas of the body. So we see ourselves playing very nicely in -- across the entire spectrum, either in monotherapy in the milds and moderates or in the combination of some sort, maybe on top of a biologic. The best biologics today, don't clear people 100%. And so most patients, even on a very powerful biologic will still need some kind of topical. As it relates to competitors specifically, there's not a ton of noise in the space. Obviously, our colleagues at Dermavant are also advancing a product that's a nonsteroidal agent as well. So -- but largely, most of the agents are decades-old type of products that don't receive a ton of promotional effort as it relates to the competitive space. And most of the competition, so to speak on a competitive noise in share of voice are for that very small slices of patients that sort of are eligible for the biologics. So what you see on television today are largely competing for very small sites of the population. About 1/4 of those patients are sort of severe enough to receive, but only 10% sort of get those products due to access. So the remaining 90% or so the pie and of the population -- treated population are very much in line for a product like ours.

So you said 80% to 90% get -- use topicals. How is that topical used? Is it due to limitations for steroids? Is it more on a limited basis of several weeks at a time? Are patients accustomed to actually being -- using a topical for chronic use?

Yes. So great question. I think it's all of the above. There's a lot of variety in terms of how they're being used. But to the point of duration, many of the package and sort of -- still lot of products sort of limit the absolute term, if you will, a duration of use anywhere between 4 and 8 weeks are typical. And then very typically, a position like Patrick would sort of cycle somebody or step somebody down to a nonsteroidal agent like a calcipotriene, like a calcineurin inhibitor. And so there's this constant churn effectively of switching back and forth between steroidal products and nonsteroidal products to manage that patient. And so -- and again, an agent like roflumilast, which has the utility and no real limit to its use in that sense. I think can sort of obviate the need to potentially churn and cycle and constantly be switching your regimen and to maybe potentially limiting some of the polypharmacy that going on, because in many cases too, based on the patient's disease location, you might actually end up with multiple products. So you have the steroidal products for the sort of more tougher skin areas like your elbows or knees, you end up with a calcineurin inhibitor, you have it on your face, you might end up with a shampoo of some kind if it's in your scalp. So sort of a one-stop shop approach may be achievable with a product like topical roflumilast.

So there have been some launches in topicals in the space and there certainly is going to be one in the relative near term, one underway. How do you map out your strategy for launching? And what are you using for comps as far as determining how you're going to proceed?

Ken?

Yes. So thank you, David. So I think, I guess, for the competitive -- there will be a competitive launch. Clearly, it all starts with sort of having a very, very innovative product. And what we've seen historically in the very recent past is a number of products that have launched have been sort of reboots of other older products that have been reformulated into new vehicles, which obviously do offer some benefits to the patient, but aren't necessarily, I think, advancing us to the place where some of the next-generation nonsteroidals can take us in terms of having that efficacy of a steroid, but having the ability to be used everywhere and for unlimited duration. And so I think the fact that there's competition there is actually good for us. I think all boats will rise with that rising tide. And it doesn't necessarily deviate or change our strategy from the beginning, which has really been about having the most innovative products, coupled with a very access forward philosophy. From the beginning, we've been talking several years now regarding our approach around our access and while sometimes you can get whittled down to a simple straight sort of factor like [ development ] pricing, it's a combination of multiple things, but pricing is clearly one of them. And we've stated before that pricing more modestly as an approach is kind of our philosophy to enable the most benefit and the most number of patients to get benefit from our product. That, coupled with the reduction in physician prescribing burden, which is also a major hurdle, and we've seen that across the board, whether you're talking about topicals, the systemics, injectables. Anything that adds to the burden of the decision in terms of getting the product is in effect a barrier, it's an unseen barrier oftentimes. It's not a clinical barrier, but it's something that can really impede your launch. So we want to be focused on things that drive, obviously, most innovative products, affordable to patients and also the reduction of prescriber burden and those things together, I think our excellent recipe for successful launches. But again, the most recent launches that we've seen in the market have not necessarily hit on all of those particular aspects. And so we've seen, unfortunately, some more modest launches or self-limiting activity in the market that has caused some troubles.

Now, you referred to pricing, considering that generics are part of the competition. What are the -- what is the pricing of those generics? And how could roflumilast be compared to those?

Yes. So the pricing of most generics, it's obviously a wide range and there's hundreds of generic options out there. But if we service -- take calcineurin inhibitors as an example, that price range is somewhere, let's call it, $400 to $500 per unit or per 2 per month. And so we've talked about being maybe a little bit north of that, but not at the point where you're seeing some of the other branded competition coming in at $800, $900, even up to $1,100 a unit. I think being up in the vast stratosphere really can impede your uptake. And so I think product pricing is sort of more in the middle of that band, more modestly, I think, enables better access for those who ultimately will be covered and for the considering, won't be covered to be able to reach for the medication as well. So really, really plans of a volume opportunity here, perhaps much more than a price skinning opportunity is our approach. And we know that there's well north of 2 million patients out there today in a dermatologist office that are receiving topical therapy of some sort. So with that type of opportunity, what we're trying to do is make it as sort of painless as possible to be able to adopt the medication like ours, whether it's your first or that [ next 52 ] agent, which, by the way, in the topical market, in particular, because there's so much natural churn built in, you see a lot of dynamism in that marketplace. So many shots on goal, so to speak, versus, say, the systemic market where if you are the next IL17, fourth and fifth agent, you're going to be waiting behind one, 2 or 3 other biologics to get your shot, which could entail waiting 2 years or something to get access to that patient, whereas in this particular arena, I think it's much more dynamic and many, many more opportunities for people to experience a product like ours.

So at the end of the day, the argument that some people push against the new emerging products is that generics will make it difficult to enter. And that you're basically saying no, it won't because we're not going to be priced so differently that it should move the needle with the physicians and the payers. Given that [indiscernible] estimates for the year for the first year of launch in 2023, you're about $90 million in revenues. Is this a reasonable number? Given that there have been -- it's hard to find a real true comp for the psoriasis market for an innovative topical. Is that reasonable or conservative, aggressive?

Yes. David, I think it's very much representative of what I would call, steady progression is what we would expect. I think the demand for the product, based on all the restricts we've done and all the conversations we've had and the profile, the strength of the profile, I would expect a very positive reception to the product. The demand from a script perspective absolutely should be there given our execution plan. However, one thing to expect is, as all things go, access isn't instantaneous. So access is built up or coverage, so to speak, is built up over a certain period. So with many products you see on the beginning, kind of less coverage and over the course of the year, you're going to pick up payer by payer, and that's when you're going to see improvement, for example, in a net revenue picture because net revenue typically will always lag the prescription volume due to not having the coverage that you're looking for front. That being said, we're still anticipating being able to provide some patient access solutions to help patients who aren't covered. So I absolutely expect the TRX trend, if you will, to be very, very strong. And then the revenue trend to sort of fall after that.

If I could maybe just add, David, to follow-up on your point about the analogs. I mean, I think the challenge really is, if you look back in the last 2 decades in the topical space, really the only innovative product in that space was Eucrisa. And Eucrisa had all kinds of issues with its product profile. There were other issues, I think, as well. But at the end of the day was the burning thing that really killed Eucrisa. Prior to that, it was 2,000 with the launch of the topical calcineurin inhibitors, and they achieved $600 million in sales in 4 years on the market. Year 5, they [ take ], because they got a black box warning. But I think that the uptake of the TCIs really speaks to the need for innovative nonsteroidals in the dermatology space. And when dermatologist got an innovative, reasonably good, nonsteroidal, they started writing it like crazy until the black box warning came along. And I think that's probably the closest analog that an investor could look at to what's possible is the launch of the TCIs back in 2,000.

Got it.

And the need, David, that was indicative about really hasn't been sort of quenched, right? There's been others that are talked about that opportunity. So really, no individual products stepped in and taking full advantage of that since then.

Got it. Let's move on to atopic derm. You have a Phase III trial in the works underway. Data should be on the horizon, I guess, when could we see data from those studies? And how does that market differ from psoriasis?

So let me just maybe make a couple of comments, and I'm going to ask Patrick to address the opportunity, I think, in more detail. But again, as I mentioned in my opening comments, we're very excited about the atopic dermatitis landscape. It has been a crowded space from -- more crowded space, let's say, from an innovation space of late inhibition standpoint. But as most investors probably are aware of the JAKs, I think, are under very significant pressure. It's not clear at this point whether the oral JAKs will get approved and topical ruxolitinib is coming up for its PDUFA in the next couple of weeks. I think given the general tenor with regard to JAKs, I think they're going to probably be significantly impaired in their label from a safety standpoint as well as they have a BSA and a limitation on age. So we're very excited about the opportunity for topical roflumilast in the ad space. We don't see a lot of real competition, frankly, for us. And we've got some great data. And maybe, Patrick, if you could talk about the data and then the INTEGUMENT program.

Yes, absolutely, right. So we conducted a Phase II study, as we mentioned, in atopic dermatitis, so what's important to keep in mind is it going into this, we knew that the PDE4 mechanism had already been validated in the treatment of atopic dermatitis through Eucrisa, which although showed efficacy did have tolerability. So it's really important for us to really show that we're not going to have those same tolerability issues. And also we get an understanding of what that dose is going to look like, because we knew going in that this cream formulation in psoriasis at a 0.3% dose showed very strong efficacy. But with atopic dermatitis having a skin barrier effect, typically you use a lower concentration. So we studied 0.15 and 0.05. And in that Phase II study, we narrowly, based on the primary endpoint, which was easy percent change and -- or easy change from baseline. However, in other [ EC ] endpoints, such as EC percent change from baseline as well as [ EC 75 ], which is a binary endpoint. Both of those had a statistical scenarios of less than 0.05. So with a Phase II trial, what we were really looking for was an understanding of kind of what that dose would look like. And given the fact that actually both the 0.05 and the 0.15 dose showed similar efficacy, we really didn't have any questions left to answer prior to progressing into Phase III. So even though we had planned to do a Phase IIb dose range finding trial, given the fact that across the easy spectrum, we showed very strong efficacy and in the validated IGA clear or almost clear and validated IGA is the assessment that you use for a regulatory endpoint in atopic dermatitis, given that we were seeing response rates for EC 75 and validated IGA in the 50% range and the fact that we knew that both doses were working. We didn't have any questions really to answer in that Phase IIb study. So we went ahead and had our end of Phase II meeting with the agency and progressed into Phase III, which consists of 2 trials called INTEGUMENT-1 and INTEGUMENT-2 that study ages 6 and above. Those trials use the higher concentration, the 0.15 concentration. We're also conducting in 2 to 5 year-olds with the 0.05 concentration INTEGUMENT impede an additional Phase III study. And then some of those patients kind of across that -- those 3 Phase III trials will roll over into an open-label extension. And in atopic dermatitis, given that it's a pediatric indication, it's really critical to be able to study these lower age groups. So -- and we think that the product profile for roflumilast is really well suited to atopic dermatitis, because the nonsteroidal is so critical for being able to get patients off of topical steroids. Parents in particular very, very careful about what it is that they put on their children to treat this disease, because they know that it is a chronic condition that they're going to have for years. So being able to offer something other than topical steroids with a very strong tolerability profile. And again, that's where I think one of the key aspects we had to come away from for ourselves in atopic dermatitis. And we saw it again, when we later read out our separate dermatitis study was that the tolerability profile looks nothing like Eucrisa. So we don't get any stinging and burning. That's a component that is kind of just independently associated with their program. It's not a part of the PDE4 mechanism of action. And we already know, again is a validated mechanism for this, what that efficacy should look like. And so we're very excited to read out the INTEGUMENT trials at the end of 2022 and progress the atopic dermatitis program.

So 2 more questions on the Phase III. #1, the primary endpoint of the Phase III is a little different than that of the Phase II. How these endpoints compare, I guess, in difficulty to achieve. And #2, the issue of potential placebo response in these populations that certainly had some impact on the Phase II. How do you mitigate that risk into the Phase III?

Yes, absolutely. So that Phase II trial was -- it was small. We had about 45 subjects in each arm. Remember, it was 2 -- it was about 145 patients. We had 2 active and one vehicle arm in the Phase II study. Our vehicle response there was a little bit higher than what we anticipated. And keep in mind that a vehicle arm is not -- it's not testing placebo, right? This atopic dermatitis, the kind of bedrock of treatment is a strong moist drier. And we know that our vehicle isn't can act as pneumonia. And so it would be anticipated to have some effect on the disease state. So being able to understand what that vehicle rate is, then we can easily power our Phase III trial to be able to address the difference between vehicle and active. So for instance, on the EC 75 and the validated IGA endpoint, our vehicle was around 30%. Our overall efficacy was around 50%. So then it's just a matter of powering the study. And in the Phase III trials, we have around 650 subjects, so significantly larger than the 145 that we had in the Phase II in both INTEGUMENT-1 and INTEGUMENT-2. And that's spread across just a single active dose as well as a vehicle. So again, just we're able to just go with a single dose in all of our Phase III studies. And that gives us a greater than 95% power to see the difference, similar to what we saw in the Phase II study. And the size of -- the reason we have to tie -- power size of studies is really driven by the size of the safety database that we need as well as our desire to kind of go deep into the secondary endpoints, so that we'll be able to have the strongest label possible kind of coming out to support us on the commercial ends we read out the trials.

Got it. I'd go on to the foam. You have 2 additional Phase III trials underway. Could you tell us about seborrheic dermatitis as well as scalp psoriasis which is obviously very similar to psoriasis that's on the scalp. How those trials are structured and when we might be able to see readouts?

Yes. So focusing on seborrheic dermatitis first. The -- both of the foam programs actually used 0.3% with a formulation, which is very similar to our topical cream also at 0.3% for psoriasis. So some small changes were made to allow it to be actually presented in a foam formation, including the addition of propelling and adjustment of some of the existings. So we're already kind of new going into both of those programs at 3% was going to be a strong dose. So in our Phase II studies, we really just focused on the 0.3%. So we do think that there is a strong read through from our psoriasis program into both seborrheic dermatitis as well as scalp psoriasis -- scalp psoriasis in particular, because that condition is really just psoriasis that's located on the scalp. And as well, we're looking at the same kind of body IGA endpoints that we studied in DERMIS-1 and DERMIS-1 with the cream formulation. So with foam, it's the ability to not just treat care bearing areas, but really to treat the disease wherever it appears. And for seborrheic dermatitis, that's also important because not only does it appear in the scalp, where the itching can really drive down quality of life for patients, but also it appears on the face and the upper chest behind the ears. So this needs to be a well-tolerated product. And that's exactly what we saw in the Phase II trial. So one of the key differences between our Phase II and Phase III studies for SebDerm is just the size. So we kept this overall study design very similar. Again, we only studied one dose in Phase II. We have one dose in Phase III. But we went from around 225 subjects in our Phase II or seborrheic dermatitis to 450 subjects in the Phase III. We also dropped the age down just a little bit in those studies based on our end of Phase II discussions with the agency. They wanted us to go down to 9 years of age into Phase III. But recognizing that this is a very rare condition in that patient population. But we're still using the same IGA success endpoint that we used in the Phase II trials. And the efficacy that we saw even with only 225 in Phase II was really amazing. I mean we had very, very low p-values all the way across our secondary endpoints. So we think that this is going to be a very straightforward Phase III program. And then with scalp psoriasis, I mentioned, I think the really critical aspect of that is that we're addressing both body as well as scalp psoriasis. And that we anticipate based on the findings of the Phase II study, where we saw almost identical efficacy between on body IGA between the cream and the foam formulation that will have a very similar safety as well as efficacy profile to what we saw in DERMIS-1 and DERMIS-2.

I think it's worth pointing out that both STRATUM, which is our SebDerm study and [ erector ], which is the scalp study. Those are single Phase III studies, the FDA agreed to a single Phase III versus duplicate Phase III. And then your question around timing, we would expect to see results from the STRATUM study in SebDerm. Sometime Q2, Q3 next year, so around the middle of the year, and scalp should be somewhat after that in the second half of next year, but probably before we see the ad results just because the ad trials are so large.

Can we talk the need for both indications? What is there for SebDerm right now? And while yes, scalp psoriasis is just psoriasis in the scalp. How is that addressed right now?

Yes, Patrick, you want to take that one?

Yes. So both of these conditions really suffer from the challenge of polypharmacy, because [ optimized ] patients are requiring different potencies for their body to treat whatever either of the 2 conditions are actually treated very similar. And then multiple treatments in the scalp to try and address both the scaling and/or the itch. And all of this is really geared to try and reduce the patient's overall exposure to topical steroids, especially when you're talking about treatment on the face, that's something that you really want to avoid because of the local side effects. So the -- what we've seen and what our vision is for how this really is going to improve patients' lives. It's the fact that you have a single product with the strength to be able to treat the condition wherever it appears as well as the tolerability, because it's a nonsteroidal, because of the excellent tolerability profile that patients and doctors won't have to worry where they're using it. And that's one thing that you always have that trade off kind of in treating these patients, especially with psoriasis. You have this trade up where you give a patient a strong enough prescription where you know they're going to get efficacy. Once they walked out in my office, I was concerned that after a couple of weeks they forget where it was, I was asking them to put it, and then they would get into trouble with regard to kind of local side effects, because they'll put it into -- in a [ nutritious ] area, they'll put it behind their ears or on their face, that was -- it's really too strong to be used there. So with the foam formulation, you have that strength to really be used anywhere. And then the reassurance that no matter where it goes, you're going to see the same strong safety profile that we've seen to date in all of our programs.

Now we're getting towards the end here. I'm going to end with the JAKs. Certainly, you have 2. One of them has kind of had some difficulties recently. The other one is formulated differently for deeper penetration, different indications. So since you're -- our conversations in the past, you believe it's not the JAK mechanism and question is the delivery specifically of that first one that's key to address. How, #1, are you looking at redesigning it the first molecule to go after those indications again of hand eczema and vitiligo. And then how in general do you see the market for JAKs shifting right now, given, frankly, the JAKs are having a difficult time?

Yes. So I think the challenge with any JAK is that you want to minimize systemic exposure. And regardless of what any drug company says, all topical drugs have some systemic exposure. When we were developing our JAK, we didn't want to get too much into the blood. And so we developed ARQ-252. We ran a study with it and we were a little too cautious apparently. We didn't get in as much as we needed to for efficacy. So we've gone back and we're dialing up the drug penetration so that we get more exposure. We still don't want to get too much because then you start getting in the safety issues, but we need to have enough that we're -- it's efficacious -- in the indications we were studying vitiligo and hand eczema, it's been shown that JAK inhibitors work in these indications. So it's just a matter of getting enough drug where it's supposed to be without too much where it's not supposed to be. And so we're hoping to be back in the clinic before too long with a reformulation of the 252 cream. Separately, we have developed ARQ-255, which is a deep penetrating version of our JAK. Very importantly, it's designed only to penetrate where you want it, which is in the hair follicle. The reason for that is, so that it's been shown that oral JAK inhibitors work very well in alopecia areata, but topical JAK set failed 3 times in alopecia areata. When you see a fact pattern like that, where an oral works and topical doesn't, you immediately think, in some cases, the same top drug, you think drug delivery. So we've leveraged our unique dermatology development expertise to develop this deep penetrating version of our JAK. And we hope again to take that in the clinic and prove that we are able to effectively deliver it right where it needs to be, which is way deep in the skin at the base that hair follicle. In terms of your question about the JAK landscape, yes, I mean, I think -- again, I think the oral JAKs in dermatology are really in trouble, in my opinion. I think the FDA has made it very clear, they're very cautious about it, particularly in the 80, where you're treating little kids and when you're using higher doses, they're going to have a very hard time. If they get approved at all, I think it's going to have significant safety warnings. I think in the case of the topical JAKs, they will find a place. I don't think AD was the right place to go with the topical JAK. That's why we didn't study it, because, again, little kids and large body surface area and skin barrier defects; so systemic exposure is a particularly bad thing. But in areas like hand eczema, where you need a very, very potent drug, and it's a very prevalent condition or vitiligo, where there's a very high unmet need and no approved therapies. I think JAKs are probably the best way to go. And so I think especially the topical JAKs, we'll find a space in certain segments. And then it's going to come down to who has the best JAK.

Got it. And with that, we've hit the end of our session. Thank you so much for virtually attending and look forward to chatting again soon.

All right. Thanks, David. Good to see you around.