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

Joining us. My name is Vikram Purohit. I'm one of the biotech analysts with Morgan Stanley Research. This is the fireside chat with Arcutis Biotherapeutics. Very happy to have with me CEO, Frank Watanabe. Frank, thanks for joining us.

Thanks for being having me.

Of course. Before we get started, I need to read a brief disclosure. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. [Operator Instructions]

With that, let's get started. We have around 30 minutes. Frank, before we jump into any sort of detailed Q&A on derived pipeline, you want to just take a few minutes and just level set for all of us and talk about kind of where the company is today, where the pipeline is today. some of the key milestones you think you've hit throughout the course of the year?

Sure. Yes. So well, we've had some recent interesting recent developments I think probably, very importantly, we're very well capitalized at this point. And we did follow on financing just after approval. We also took down another chunk from our debt facility. So pro forma as of the end of Q2, we have about $570 million in cash on the balance sheet. That is really critical in giving us the resources that we need to launch ZORYVE correctly and also to continue our advance pipeline quite a bit in the pipeline. We recently read out a Phase III with our reform last foam in seborrheic dermatitis. And that data was actually presented at EADV European meeting last week. And then we expect to read out another Phase III in scalp and body psoriasis, probably late this quarter, early part of next quarter. And then we're expecting to read out 2 of the large Phase IIIs in atopic dermatitis before the end of the year. So a lot of clinical catalysts -- and obviously, there's quite a bit of R&D burn associated with that. We also continue to advance our other pipeline programs. We expect to be in the clinic this year with ARQ-255, which is our novel topical JAK inhibitor for alopecia areata. And then I think probably very noteworthy, as many of you may have seen, we acquired another company just a couple of weeks ago with an early, but we think very exciting asset and we're going to look forward -- we are looking forward to advancing that as well. So a lot happening on both the commercial side and on the clinical side with the company right now.

Okay. Perfect. I think that's a great segue into ZORYVE, the recent launch of psoriasis. Let's start by talking about, I think what's been a big topic of focus to a lot of investors is the initial weekly script trends, but there's been a big focus on how ZORYVE is doing versus a recently launched competitor. There's been a market reaction to the initial script data. How do you think people should be interpreting what they're seeing in IQVIA Symphony, et cetera, at this point?

Yes. Okay. So I'm glad you asked that question. I think first of all, it's important to note it's very, very early days, right? We're looking at 4 weeks of weekly data right now. But I think probably the more important thing for investors to understand is -- and this is something that we talked about even prior to the launch. We are taking a very different approach to the launch of the product, particularly around access for the product, right? Many companies, when they launch products will come out with very aggressive offers that end up generating a lot of sort of phantom or synthetic demand. They're giving away drug for free, they're giving away vouchers, they're buying co-pays down to 0. They're doing all these things that generate a lot of scripts, but they don't really generate dollars, and they're a real impairment on gross to nets. And I think we've seen this with some of the recent topical launches were the companies get themselves in trouble early on in the launch, and then they have to start trying to pull back from these offers, which, frankly, doesn't go well down well with physicians. We decided not to do that. We have a co-pay offer that we believe is going to be sustainable for the long term, which is what doctors want, they want predictability. We also didn't flood the market with vouchers or a 0 co-pay buy down or anything like that. And so what we're really trying to generate is true demand. And I think that's important to also think about in the context of one of the things that we've been talking about for years now is our approach to access and reimbursement and trying to ensure that we had high quality and broad access with our product, and that's why we set the price where we did. Things continue to go very well with payers. And I think what investors should expect to see in the coming months is some of these formulary decisions coming through. And I fully expect that we'll be in a very good position with payers -- and that's going to translate not only into growing demand but also a rapid improvement in our gross net and ultimately, profits for shareholders.

Okay. So I guess just to put a fine point on that then. In the meanwhile, while before we wait for part sales data to come out, what would you guide investors to look to kind of gauge how these launches?

Well, I mean I think TRx and NRx certainly 1 metric that you need to look at, although, again, I think 4 weeks in is probably a little early to be trying conclusions. TRx/NRx I think breadth and depth of prescriber -- of the prescriber universe, our reach and coverage as a sales force. And then I think, again, very importantly, will be our access wins and there's been a lot of discussion, I think, in the space of late around gross to nets. And ultimately, that's the only way that you improve your gross to net and get to something that's sustainable is by getting access. And we've seen, again, some of the other recent topical launches have really struggled with high and persistently high gross to net. And with our pricing and access strategy, we're looking to break out of that. So I think folks -- investors should be watching to see us deliver on that promise in terms of access and reimbursement.

Got it. Got it. And I know you haven't provided guidance on kind of long-term gross to net, where you expect to get to. But how long do you think it takes to get to a steady state?

On average, I would say, it takes you about 12 to 18 months to get to steady state, right? Each one of the payers has their own cadence for when they review their formularies. We are coming up on the annual cycle for the big payers to review whether their formula will be for the next year, new products may or may not be as part of that annual review. It's just a matter of timing. But typically, you think about there are really 3 big pharmacy benefit managers in the U.S., Express Scripts and it typically takes about 4 months to review new product CBS is typically more like around 9 months. Optum actually reviews them a little more frequently, but it's unpredictable exactly when you're going to get reviewed by Optum. So it just takes you a while to rack up all of those payers. Having said that, again, I think with our pricing decision, I think we're still hopeful that accelerate some of those reimbursement decisions as well as, and I think very importantly, get the kind of high-quality access that we're looking for, which in our minds is ideally as few lives covered with a prior authorization as possible, right? And again, if you look at some of the more recent -- for a while now in the branded topical space, insurers have put really considerable barriers in front of these branded products, multiple step edits, multiple prior authorizations in some cases, dermatologists don't want to do prior authorizations for a topical. And so our strategy has been from the outset to try and minimize those access restrictions, make the drug as easy as possible to get. We think that translates into ultimately high volume and better profitability, a better gross to net.

Got it. On that topic, what sort of metrics or pieces of data do you think you'll be reporting out in the first couple of quarters for the launch to kind of help people get a sense of how this are going?

I think we'll share metrics around all of the data points that I just discussed. And very importantly, as we get major decisions on insurance formularies will be announcing that. I don't think -- I certainly won't expect that we would announce every health plan. There's too many of them. But certainly, CVS, ESI, Optum, maybe prime. Those are the kinds of newsworthy events that we would announce to the investment community. And that's, again, something that investors should really be watching to see if we're delivering on our strategy.

Got it. Gross to net, do you think you'll be commenting on how that's trending quarterly?

I doubt we're going to comment on that. I think some of the other companies in the space have gotten themselves into trouble on that. But having said that, at the end of the day, investors can see gross to net, right? They know the volume and they know the sales and they're not figured out.

Fair enough. Okay. Maybe shifting gears a little bit. From a qualitative standpoint, what are you hearing from the field in terms of feedback on both from a constructive standpoint? And also if there's been any pushback on any parts of the product profile?

Yes. So I think that the feedback has been very, very positive from the field. The doctors are excited to have another option. I think the inclusion of intertriginous, in our indication is something that has been really sought after by doctors, right? That's one of the more difficult patients for doctors to treat. And I think the tolerability profile is another area that we've gotten some very good feedback from doctors. They certainly appreciate the rapidity that we brought the product to the channels, availability of samples. And so really, at this point, we haven't gotten pushback on anything, I think, of note,

Got it. And do you have any information at this point about how the product is being used? Is it more stand-alone? Is it in conjunction with topical corticosteroids?

Well, I think it's important -- in conjunction with top of steroids. Yes. We don't really have a lot of feedback on that. I think the majority of patients are not on systemic therapy, and so you wouldn't expect the majority of patients to be in combination with the systemic. But yes, the steroids -- I think it's just too early to tell on that. That, I think, will not be all that comment. I think it's going to be more sequential because remember, dermatologists are very using -- comfortable using steroids, but for shorter periods of time, right? And what they're looking for is something that gives them the efficacy, but can be used chronically for a chronic disease. Using in combination with the steroid for short periods, maybe would be okay. But longer term, then they haven't solved their problem of the challenges of the topical -- chronic topical steroid use.

Got it. Got it. Okay. Before we leave this topic, let me ask you one more question going back to pricing. Could you just kind of walk us through what the thought process was for setting the WAC price that you did you priced at a bit of a discount to the product from [ Dermavan ] [indiscernible]. And you previously mentioned the CMS specialty tier as kind of a cutoff that you used to kind of inform the division. Just kind of walk us through all the in parts.

Sure. So I think it's important to maybe start out by pointing out that we set our price because we think it's the right price, right? Where other companies happen to price is really sort of tangential frankly, from our standpoint. We had done -- over the last 4 years, we've done a series of research with insurance companies really focused on what is the price point that would allow us to secure the kinds of access that we want, again, minimal restrictions, ideally, no prior authorizations, and we set the price based on what the payers were telling us. One other key consideration was that Medicare specialty tier of $830. Now at the moment, we're not contract with Medicare, looking forward with seborrheic dermatitis and atopic dermatitis, I think government will become a much more important payer for us, and so we need to be cognizant of that. But we also know from our research that many of the private payers do use Medicare specialty tier as a guide for their own restrictions as well. And if you cross that threshold, they will also start to add restrictions to your product. And so we wanted to make sure that we stayed below that, both thinking about future indications as well as knowing that some of the private payers would use that as a trigger. And again, relative to the other products, I think it's an interesting anecdote I think it's reflective of a different pricing philosophy, but we certainly didn't approach this saying, well, we're going to price at a discount to company X or company Y. We came at it from this is the right price, and this is what we're going to set it at. The one other thing I will acknowledge, I think for folks who have been following the story for a while, we had been talking about a sort of $400 to $600 WAC, and we're obviously higher than that now. I think that what we saw over time was that payers as we read out more clinical data and they could see the full extent of the product profile as well as some of the competitive dynamics, their threshold for where they would start imposing those restrictions did drift up a little bit, and that allowed us to slightly higher WAC than we had originally anticipated.

Okay. I'd like to focus on other parts of the pipeline now as well. But before I do that, I just want to pause to see if there's any questions from the audience on psoriasis and the recommercialization. All right. Move on to atopic dermatitis. integument one, integument two, data by the end of the year. What can we expect to learn? And what do you think is the hurdle for both readouts?

Yes. So just to maybe level set, we expect top line data by the end of the year from both studies. So we'll know whether it worked or not. But we won't have the full extent of the data set until a little bit later. And you typically don't want to disclose everything either because it threatens publication and presentation, right? I think in atopic dermatitis, for a novel nonsteroidal to be successful, you probably need to be comparable to a mid-potency steroid in terms of efficacy, right? That's really standard of care in atopic dermatitis as opposed to psoriasis where doctors are using high-potency steroids. They generally don't use those in atopic dermatitis. So something like triamcinolone. So say, a 50% reduction in the easy without the safety concerns of a steroid or a topical calcineurin inhibitor, I think that's a very winning profile. If you look at our Phase II data in atopic dermatitis, we saw something actually substantially better than that, about a 72% reduction from baseline and easy. I don't think we need to hit that again, frankly, to be commercially successful. But if we did, that's more like a grand slam home run, right, to have that level of efficacy, which really is comparable to the very best treatment in atopic dermatitis, with the kind of safety and tolerability profile that we have with topical reform last, I think, would be an incredibly compelling value proposition for doctors and patients. And in the atopic dermatitis space, I think, most importantly, parents right, who are ultimately often the decision make for atopic dermatitis.

Got it. Got it. And as you mentioned, with the Phase II study, you did see numerical benefits across different efficacy measures, but the primary endpoint didn't quite hit stat sig. So -- when you look at the readout from that study, I mean, what are the lessons learned for optimizing the Phase III program to maximize your transfer to win here?

Yes, I run a bigger study. I'm seriousness, that was run as a proof-of-concept study, right? It was 136 patients across 3 arms, about 45 patients in Arm. And we were just looking for a signal that it worked. We expect it to go on to do Phase IIb before we went to Phase III. The data was strong enough in the Phase IIa that we skipped Phase IIb and right to Phase III. We actually hit statistical significance on multiple secondary endpoints, percent change from baseline in easy 75 IGA clear. We very narrowly missed statistical significance on the primary of absolute change from baseline easy , but clearly, the drug works. And I think if you look at the Phase III endpoint, which is IGA success, the only thing the FDA will accept, it was 37% versus 22%. So a very robust delta between active and vehicle. And so Phase III was just a matter of powering up right? So the Phase III trials are all roughly 650 patients per study in a 2:1 randomization. So it's about 10x as many patients as was in each arm in Phase II on active, and that gives us 95% power to detect the difference that we saw in Phase II and Phase III. And that's really the essence of the solution, right? We didn't do anything trying to push down the vehicle effect. We think it's a real effect and ultimately, in the marketplace, that's a benefit to the patients that the vehicle is as good as it is. And then you get an additional added benefit then from the drug.

Got it. Are there any key differences or similarities that you would call out in terms of the patients you're enrolling or the design of the study between Phase II and the Phase III program?

Yes. So we typically design our Phase IIs to be as close to Phase III as possible so that there's good read-through. There aren't that many differences, obviously, about the size being much, much larger. We're enrolling all the way down to age 2 in our Phase III program, although INTEGMENT-1 and 2 only go down to age 6. We have a separate pediatric trial versus 18 and above in Phase II. And we had 3 arms in Phase II. We've now gone down to 2 arms, a higher strength in the 6 and above and a lower strength in the 2- to 5-year-old. And that's about -- oh, and then we changed the endpoint. So IGA success is our primary endpoint. But other than that, the inclusion and exclusion criteria are the same. The duration is the same. So I think investors should feel comfortable that there's a good read through from Phase II to Phase III.

Got it. Okay. So assuming both studies are successful, what's the time line, the filing, potential approval?

Sure. So it takes typically 6 to 9 months to write an NDA or FNDA. There's a lot of data goes into it. I think our first one was 130 gigabytes of data that we had to submit to the FDA. So it's not a trivial undertaking. So let's say, we have data by the end of this year, maybe sometime middle next year to -- in the Q3, we would be filing and then it's an S&D. So we'd expect a 10-month review from the agency.

Got it. And then assuming you get approved, where do you think this fits between topical steroids, ENI, [ upsell ], Eucrisa? Where does this fit in?

Well, Eucrisa is easy when no one really sees you Chris anymore. So that kind of takes care of that. I think we will -- if our product profile looks like it did in Phase II then we're in a position to compete head-to-head against topical steroids and topical caster inhibitors. Parents, again, who are often the key decision makers don't like putting steroids on their kids and they particularly don't like using drugs that have boxed warnings like TCIs, right? And that's been -- dermatologists aren't terribly worried about TCIs, but moms are. And that's been the real challenge for TCIs. And I don't think that DUPIXENT or Opzelura really are competitors for us. DUPIXENT is generally a second line agent for more severe cases, Opzelura with their label is probably third line even after Dupixent for the majority of patients. So those products really are competitive set. We're really going to be competing for those first-line patients. And again, chronic disease like psoriasis and people aren't necessarily comfortable especially using steroids chronically.

Got it. Got it. Okay. Great. Maybe let's move over to Tom.

Yes.

So you mentioned in your opening remarks that you recently released data for SebDerm from your Phase III program. Do you want to just touch on some of the highlights of that study?

Sure. So I think the results from the STRATIM study were nothing short of spectacular. -- win 80% IGA success rate, half of patients got to completely clear at 8 weeks. And again, with a formulation that's in nonsteroidal, very safe, very well tolerated, and the foam is something that patients can integrate into their daily lives, which is one of the challenges with existing therapies like [indiscernible] of all shampoo and a lot of women don't watch their hair every day. So it makes it very difficult to use the therapeutic shampoos. So seborrheic dermatitis is a very large market. It's probably as big as the psoriasis market. There are as many subderm patients as there are psoriasis patients in their practices, and there hasn't been any innovation in decades in that space. So there's a level of excitement that was very encouraging to us. In fact, I mentioned the data was presented at EADV last week, and the presenter mentioned how easy the study West enroll. They opened the study up and he said the patients were literally coming out of the woodwork because there are so many of them, and they're such a high unmet -- so we're very excited about that opportunity.

How do you size the commercial opportunity here for SebDerm versus something like psoriasis --

if you think about the dermatology space, right, which is where Arcutis is really focused, seborrheic dermatitis and psoriasis are about the same size addressable market, patients who are in the dermatologist office receiving topical treatment today, they're about the same size. Atopic dermatitis in the dermatologist office is also about that same size. The difference is there's a very large chunk of atopic dermatitis market that's outside of the dermatology market, primarily pediatricians and primary care. That's a little bit less true for SebDerm and it's much less true for psoriasis, right? So I think within the derm specialty, these are 3 roughly similarly sized opportunities. Ultimately, AD is the biggest, then probably sub derm and then psoriasis in terms of total addressable market across all therapeutic.

Okay. All right. Understood. [indiscernible] body psoriasis, you said data coming up late this quarter, early next quarter. What are the expectations there? What are you hoping to see?

So again, thinking about our Phase II, which looks very much like the Arrector trial the Phase III trial, the -- on the body, it looks like the cream, which isn't surprising, right? It's essentially identical to the green, so you'd expect it to work the same. And that was what we saw in Phase II. That's what we expect to see in Phase III. And just to remind investors, Arrector has a co-primary of body IGA and scalp IGA. So ideally, we will get approved for the treatment of everywhere in the body, including the scalp. On the scalp, we actually saw a fairly significant increment in efficacy, right? We saw about a 70% IGA success rate on the scalp, not sure why maybe skin is thinner on the scalp certainly, there's a higher density of hair follicles. So maybe we're getting more follicular delivery, I don't know exactly. But I think if we see something similar to that in Phase III, we would be very, very pleased. Again, the challenge with existing scalp therapies like SebDerm is safety, especially on the face and around the eyes. And then the ability for the patient to integrate the treatment into their day-to-day routine and it's just a challenge with existing therapies.

Yes. So assuming that this gap in body psoriasis study is successful, would you plan to potentially do one NDA for both indications? Or would it be staggered?

They're probably going to be staggered. I mentioned how easy SebDerm was to enroll. We ended up finishing the STRATIM study quite a bit earlier than the Arrector. We're well down the road of writing the NDA for seborrheic dermatitis. We didn't want to delay that NDA to get the scalp data. And so we plan to file the NDA for foam in seborrheic dermatitis. We've said sometime Q1 of '23, we would not be able to do that if we were going to include scalp. So we'll file a supplemental NDA for a scalp once we get the seborrheic dermatitis approval.

Okay. All right. How do you think about pricing for home versus the cream?

Yes. I think, again, back to our responsible pricing philosophy, I don't expect to be a very large delta, if any, between the foam and the cream. I know it's been the habit in the industry to charge a very significant premium for foams. But payers have responded by making foams very difficult to obtain. And so I don't think investors should expect to see much of a delta between what we're pricing agreement.

Okay. Understood. And 1 question on the foam indications is duration. How do you see that playing out, especially for SebDerm?

Yes. So for scalp it's easy, right? It's very similar to body psoriasis or just general plaque psoriasis. For seborrheic dermatitis, again, it's a chronic condition. I think one of the things that we still need to establish and we'll be looking at in some of the open label extensions is once a patient gets to clear and they stop treatment. How long does that clearance last before it restarts again. And we just don't know at this point, right? With existing therapies, patients can stop treatment for some period of time, but inevitably, the disease does return. And we would expect something similar with our foam. I would also say that the body surface area in seborrheic dermatitis tends to be a little more limited than what you see in psoriasis and definitely less than atopic dermatitis. So probably annual utilization is also going to be less for the SebDerm patients. we said 3 to 4 tubes or cans a year in plaque rises. It's more like two 60-gram cans a year probably for the averse seborrheic dermatitis patients.

Okay. Got it. Maybe let's shift gears and talk about your recent acquisition of Ducentis. You stepped outside of the topical dermatology space. And you acquired an early in development biologic. What was the rationale behind this acquisition? And what do you hope that this is able to do for the pipeline over the...

Sure. So first off, I think it's important to emphasize, we are not a topical company, right? We are a medical dermatology company that happens to have the world's best topical formulator. So -- that's why we have a lot of topicals in our pipeline. And a lot of dermatologic diseases are easy to treat with topicals. But we've never thought of ourselves as a topical company. I would say probably 1/3 of the assets that we've looked at since our formation have been systemic therapies. We have extensive experience in the company. I spent more of my life on topicals, injectables and orals that I have on topicals. And that's true across our commercial, clinical and our manufacturing organizations. We have very extensive experience, specifically in biologics. Our strategy really is to focus on big markets with unmet needs, identify biologically validated targets and then find differentiated molecules against those targets, right? And DS-234, the Ducentis molecule checked every 1 of those boxes, right? There's still very large unmet needs in atopic dermatitis even with the advent of the IL-4/IL-13 compounds. There has been a clinical validation of this target CD200R. And I think it's very exciting validation in particular, the durability of effect off drug after you get patients to respond has been really remarkable with this target. And this looks to be potentially a differentiated asset. So all those things lined up got us very excited about the target. We were able to negotiate what we thought was a very compelling deal with Ducentis to acquire the company. And I think both they and we saw that the product was more valuable in our hands than it was in theirs, right? They were an early stage discovery company. They had done what they do well. We're a drug development company it was time to pass the baton to the people who know how to take it from where it is right now and get it to the finish line and commercialize it. And so it was, I think, a win-win kind of deal from the two companies.

Got it. Got it. We have a little under a minute left. Let me do a last call for questions. If there are any. Okay. If not, Frank, maybe just a final catch-up question for you. Looking out 12 to 18 months, what do you hope to achieve? What do you think the key milestones are for the company? And if you could just round us out at just reminding us of your cash balance and your associated runway with that.

Yes. So maybe I'll start with the last one. I mentioned at the outset. -- pro forma at the end of Q2, we had about $570 million in cash. If we continue to execute on our current plans, we may not need to do another financing. So the runway is kind of infinite in that respect since we're now generating revenue. But I think 12 to 18 months out, people should expect to see a robust growth in volume, but also importantly, solid coverage from insurance companies and a good stable growth to net, hopefully, sometime -- somewhere around that 50% point and as well as continued execution on the development of our pipeline and approaching launch for some of these follow-on indications.

Great. I think we'll close it out there. Frank, thanks so much for your time. Thank you [indiscernible]

Thanks for coming.

Thanks.