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

Okay. All right. Welcome, everyone. This is the fireside chat with our Arcutis Biotherapeutics. My name is Vikram Purohit. I'm one of the biotech analysts with the research team. Thanks for joining us. Before we get started, I need to read a brief disclosure statement for important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. With that, happy to have with me Frank and Patrick from Arcutis. Thanks for joining us.

Thanks.

Quite a lot to cover in roughly 30 minutes, but Frank, I wanted to turn it over to you for some opening remarks on the current state of the business, current priorities and just kind of key inflection points throughout the year.

Yes. So I think at the beginning of the year when we were talking to folks, one of the things that we talked about was how 2023 was really going to be a major focus on execution. And I -- kudos to my team for continued strong execution. I think the most recent example of that was this morning, we announced the filing of our third NDA with the FDA, the supplemental NDA for roflumilast cream in atopic dermatitis. The second one this year alone, Patrick and his team are just doing an incredible job. And hopefully, we can talk a little bit more about the AD opportunity for the company. And we continue to build on and deliver on this pipeline in the product with topical roflumilast. I know that word gets bounced around a lot, but we're in a position where in very short order, we're going to have 4 different indications, 3 different concentrations, 2 different formulations for various inflammatory skin diseases. So a very unique situation, I think. I think everyone is very much focused on the commercial launch of ZORYVE in plaque psoriasis that continues to progress nicely. I think everyone has probably seen the Q2 results. We saw very good growth in demand, but also improvements in gross to nets. We mentioned on the quarterly call that we've seen further improvements in Q3, and we're looking forward to reporting out Q3 results, I would expect to see continued progress on both demand and on our gross to nets on the launch. The feedback from the clinical community and from patients continues to be outstanding. This is a product that really is delivering. It's matching up to or even exceeding doctors' expectations in terms of efficacy and tolerability. We also continue to make great headway on access, which we believe is very important particularly to be able to drive significant conversion of topical steroids over to ZORYVE. It's got to be relatively easy to rate ZORYVE. We announced in July that we picked up the third major PBM. So in less than a year, we picked up all 3 big PBMs over 80% of commercial lives and over 90% of those lives without a prior authorization, which we've always felt was really critical to driving the uptake of ZORYVE. And then beyond topical roflumilast [indiscernible] beyond ZORYVE, excuse me, and we're expecting, hopefully, approval for the foam in seborrheic dermatitis in the middle of December, which would set us up for the launch early next year of foam. I think the excitement level around seb derm in the dermatology community is really remarkable. That's all they ever want to talk about. It's the foam and seb derm. And then with the most recent AD filing, that sets us up for approval probably in Q3. And again, Patrick can comment on this morning. But we're very excited about our opportunity in AD as well. I think our profile is lining up very nicely, especially folks may have seen the long-term data we announced last week, which I think was a pleasant surprise for us and really speaks to the promise of ZORYVE in atopic dermatitis. So things continue to go very well. And we think we have a very bright future with topical roflumilast.

Great. Great. So in terms of items to touch on in roughly 25 minutes or so, ZORYVE in psoriasis label expansion to 80 seb derm, so just like you mentioned. So let's just kind of tick through them. Let's start with the ZORYVE for psoriasis first. Obviously, there's been a big focus on gross to net recently. You had mentioned earlier in the year that you're bringing on some patient access managers to kind of help with education regarding reimbursement to make sure things are being processed correctly. Any updates as to how those new team members have been additive if you're seeing any initial benefit from having them on board?

Yes, clearly. So we actually started bringing on the patient access managers in Q1. We started out with only a handful. We saw pretty quickly that they were having a really meaningful impact in the areas where they were working in getting the claims processed quickly. And so we decided on a pretty major expansion of that team. So we're up to 10 patient account managers plus another 10 contract patient account managers. And those -- that team of 20 is all fully in the field as of early Q3. And I think that we saw some impact in Q2 from having those folks in place. And I think we'll see even more in Q3 now that we got to the point at the beginning of the quarter when they were all in place.

Got it. Got it. Okay. And you broadly mentioned that you expect gross to net to step down in the second half of the year versus the first half of the year. Can you just walk us through just because there's so much focus on different parts of this entire gross to net process. What needs to happen for gross to net...

Sure. So what I think -- what we expect and what we've communicated is Q2 is improving over Q1 and a pretty reasonable improvement. We expect to see a similar sort of improvement in Q3 over Q2, and then another improvement in Q4 over Q3. So it should be quarter-on-quarter. If you think about the dynamics of gross to net, I would say, at least in our case, and this is true, I think, of most topicals and probably most products. But there were 3 challenges that we've been working through. The first one is just every year, deductibles reset. And in January, all of a sudden, you're subsidizing patients, again, right? So patients had coverage January 1, the insurance company isn't covering them until they get through their deductible donut hole. So the drug company ends up eating that. That resolves itself as the year progresses. The second one was just time to coverage. So in Q1, we only had coverage at Express Scripts. We were supposed to pick up the second PBM towards the end of the first quarter, that ended up getting delayed into the second quarter, so we didn't benefit from that in Q1. Then in Q2, we saw an improvement when we picked up the second PBM. And then we picked up the third major PBM at the beginning of Q3. And so that will be a contributor then to improvement in Q3 as well. And now we're at a point where we have 80% coverage. And so that should only continue to improve on our gross to net. And then the third one is -- and doctors' offices are used to reiterating either generic steroids that just go through without any hassle or writing drugs that require a prior authorization, they've got to fill out a bunch of paperwork. There's really sort of sits in the middle where you don't have to fill out a bunch of paperwork, but you do have to do a few things, right? You need to tell them the diagnosis and prior failed therapy. And so we've just had the invest time and resources in educating office and, hey, when you write the script, make sure you send these 2 pieces of information to pharmacy and making sure that the pharmacy then processes them correctly. That work and PAMs are helping out with that. That work is something that is constantly improving our gross to nets as well. So when you bring those 3 forces together, that's why you see the steady progression in our gross to nets. And we expect that as we get into '24, we will reach our steady state. We'll have another deductible reset hit in January, just like everyone else does. But the coverage and the execution pieces should continue to improve throughout the year, and we expect that we'll reach steady state at some point on the psoriasis business. We have the added complexity rate of 2 more launches next year, and each one of those will have their own sort of life cycle of gross to nets. And so at a portfolio level, it's going to be a little jumpy, but we expect to see a nice progression on the psoriasis business.

Got it. So for the steady state gross to net for psoriasis at some point next year, do you think it's fair to assume that it's going to be in line with steady state expectations, other kind of branded topical derm players have laid out for themselves?

I think. Yes. Yes.

Yes. Okay. I guess since you mentioned it, let's just try to kind of unpack the dynamic of stacking indications, what that does as well. So when you get a label expansion in AD assuming that comes through, you have payer discussions for that indication. Does that impact your coverage or your gross to net, eventually for the psoriasis indication or how is that...

[indiscernible] impact of psoriasis indication, what will, in some cases, impact our gross to net is some insurance companies look at seb derm and AD as line extensions and well, we're already covering ZORYVE so it's just covered, right? Others are going to want to go back and negotiate again. And so there'll be a delay to coverage for seb derm and a delay to coverage for AD. And during that delay, we're having to subsidize those patients, and so that will impact gross to net. But we wouldn't expect to see an impact from seb derm a negative or positive impact on the psoriasis gross to nets now.

Your point is just on the 3 franchise overall. There could be...

[indiscernible].

Indications are being stacked on top of the other. Okay. So going back to psoriasis then. Outside of gross to net, how is -- now that you've been in the market for roughly a year, refill rates and annual tubes per year, how is that tracking?

Yes. So I think refill rates continue to tick up nicely. We were in the high 20s in Q2. I think in July, we were up over 30% of our business being refilled. So growth every month, nicely. And it's probably too soon for us to make a judgment about refill rates. We had estimated that patients will probably go through around 3 tubes a year. We haven't seen anything that would suggest that that's wrong, but I wouldn't say that we have enough data at this point to confirm that either. But we continue to think that's probably about right based on what we've seen with other topicals in the psoriasis space and then based on our clinical trial data as well.

Got it. Okay. And then in terms of profile of patients coming on to ZORYVE, has that evolved at all from the [indiscernible].

Yes. No, we're really seeing quite a diversity of different types of patients that are coming on to ZORYVE. And I think that fits with the overall profile. So we're seeing patients that are being used adjunctively with systemic or biologic treatments. That's certainly something that's not excluded according to the label. We're seeing a lot of intertriginous patients. And in fact, some of our coverage has been enabling of patients who have kind of reflecting the label, which was a unique part of our development program, where we actually studied intertriginous or places of skin-skin contact. That was reflected in the coverage where patients have sensitive skin, which is kind of like not well defined, which is to the benefit of the prescriber to define that for themselves. Then they were able to use it as a first-line therapy. So we're definitely seeing first-line therapy there. And the fact that most psoriasis patients are already on a topical steroid or a vitamin D analog, means that when they come back into the doctor's office, they're ready to be switched to ZORYVE from that period. So it really is kind of across the spectrum that we're seeing different patients. I don't see that that's really evolved much since the beginning. We saw that right out of the gate as well.

And I think maybe one additional group that I would comment on is I think we've been surprised at the amount of palmoplantar psoriasis patients.

That's true. That's something that we didn't actually study in our clinical trials, but it is a part of psoriasis, and we're seeing case reports come back. It's a kind of aspect of psoriasis where patients may have primarily palmoplantar disease. As a dermatologist myself, I can say they are some of the most difficult patients to manage. You go right to the highest potency topical steroid like clobetasol or something like that. And so oftentimes, when those patients walk-in, you're like, "I don't really know kind of where to go with that." And we've seen some really amazing case reports come back on palmoplantar. So we're working with doctors to try and get these through our scientific communication like out into publication because I think it really is an important aspect of treating the disease, which is, of course, covered by our label, but it's not something that we study specifically in our clinical development program.

And I think what that really means for doctors is you have this unique product that has the power to treat something as challenging as palmoplantar. And yet it's also gentle enough that you can use it on the genitals, on the face, really anywhere in the body. We've never had a product that has this unique combination of power and gentleness at the same time.

Got it. Got it. Okay. I'll ask you 1 final question on psoriasis and then we should move on to AD and seb derm. So obviously, there's another branded competitor out there in psoriasis that launched a little bit before you did. What's your sense based on feedback you received from the field market research you've done, what's driving decision-making across the 2 therapies across different prescribers?

I don't know if there's any one answer to that question. That's a good question. The other product came up earlier. I think a lot of doctors jumped on that product early and got some early experience with that product. We also had a slightly different approach in terms of access and sampling upfront. I think that -- I would just say, I think that ZORYVE has consistently met expectations, both in terms of efficacy and tolerability. And I'm not sure that, that's always been the case with the other product in clinical practice.

Got it. Okay. Fair enough. Move on to AD then. Let's start off with the competitive positioning question there as well. So if approved there, you would be competing for a lack of a better word, with Opzelura, the product from [ Roivant ] topical corticosteroid. And where do you see yourself fitting based on the data you generated so far?

Yes. We really don't see ourselves competing with Opzelura, given their label and also I think their pricing. We think of ourselves very much as competing head-to-head with topical steroids and topical calcineurin inhibitors, which are first-line treatment in AD. And I think the challenge is -- and Patrick has experienced this as a dermatologist, mother brings her child in with atopic dermatitis and doctor says, "Hey, I'm going to give your kid a steroid, oh, no, I don't want to put a steroid on my kid." Okay. Well, let me put your kid on the calcineurin inhibiter but oh, by the way, I have to tell you, has box warning for cancer, right? Or the patient mother goes to fill the pharmacy -- prescription in the pharmacy the pharmacist tells the patient, then the mother is calling the doctor back and complain, I don't want to put this drug in my kid. I don't want to cause cancer. There's a lot of friction in getting kids on topical treatment for atopic dermatitis. So to have something that is very effective, is very safe, doesn't have box warning can use chronically. It solves a lot of problems for everyone in the equation. And so we think we will compete very effectively in that first line against the steroids and TCIs. Anything you want to add?

I agree. I mean I think you need to offer something that goes beyond what they can accomplish with topical corticosteroids. And oftentimes, that is if I get the patient under control, then what do I do next? Because nobody wants to be chronically using topical corticosteroids, especially in pediatric patients, in atopic dermatitis, we're talking about very high body surface areas, typically, and they have a skin barrier defect. So that absorption of systemically of topical steroids is always a concern. And so I think the chronic treatment component of that is always the next problem that a prescriber or a parent runs into once they get that acute flare under control. And I think that's where the open-label extension data that we've read out really kind of provides that benefit over topical corticosteroids that moves us to an earlier part of the treatment paradigm.

Got it. Got it. And then in terms of commercial infrastructure, remind us what you think you might need to augment your current infrastructure with in terms of sales reps, additional spend for marketing, et cetera?

Yes. So I think for seborrheic dermatitis, I don't think we really need a significant expansion in the sales force. It's the same call point. And I think that sales reps can pretty effectively sell 2 products. Atopic dermatitis would be the third product in like 18 months, then it starts to get challenging. And so what we've communicated previously is we expect to expand the sales force when we get the atopic dermatitis approval really just to give us additional capacity to promote the products, we don't want to shortchange any one of these different launches. So that's probably not a doubling in size of the sales force, but it's some significant increment in the size of our derm specialty sales force. And we continue to think that, that's probably the right strategy for us.

And then for primary care? Are you still thinking about a potential partners?

Yes. Yes, absolutely. I think for a smaller company like Arcutis, it just financially doesn't make sense to build a primary care sales force. And I know from having worked in primary care in the past as well, it's very difficult to have a primary care sales force that doesn't have a multitude of products in their bag because each primary care doc is not very productive for any 1 product. And so I think that will help us now to find a partner because there are a number of companies that have big primary care sales forces and they're always looking for additional products.

Got it. Okay. Maybe let's switch to seb derm then.

Yes. Before we do -- yes, I think it might be worth just -- if we could just take a minute for Patrick, maybe to touch on the long-term data since we just released it last week, and I don't think we've had a chance to publicly talk about it and sort of why we think it's so significant if it...

Yes, please, please.

Yes, I think -- so I touched on this a little bit just with regard to the 2 important aspects for treating AD. You want to get the patients under control early, and we really focus on that with our 2 Phase III studies that were 4 weeks long. But the latest data readout for the open-label extension trial follows patients through to a total of 56 weeks. And there, I think that critical aspect of those data is, okay, what is the safety for long-term use? And then that was the primary purpose of the study. But also, what do we see in the efficacy over that time point? Your ingoing expectation would be that you would want to maintain the efficacy that you saw in your initial pivotal trials. What we saw is that over time, patients continue to kind of drift up in their efficacy. So we got about 20 percentage points of additional efficacy both on validated IGA and EZ75. And I think that's from kind of just gathering longer-term control over atopic dermatitis decreases this possibilities that are going to continue to flare. And one of the ways that we approach that as we were designing the trial is in talking with atopic dermatitis experts, how are you managing your patients right now in the real world with the topical steroids. And the answer is, well, once we get them under control, we switched them to some kind of intermittent dosing. The every other day, twice a week, just on weekends. And so we decided that the kind of twice weekly maintenance proactive on clear skin, get a patient to clear switch them over to twice weekly dosing fit best with our product. And those data look fantastic. So this is a profile that gets patients to clear. And then once they are clear, can maintain them for long term with this kind of dosing regimen that dovetails exactly with what's already out there in clinical practice and fits with the idea that for an AD patient, you need to stop them from flaring as opposed to letting them flare and then try and regain control over their disease.

Got it. Got it. Okay. Would you expect this data set kind of get socialized further? And do you think it could actually impact uptake anytime in the near term? Given this is the data set that physicians we're waiting to see.

Yes. I think there's a lot of excitement, but this is the first time anyone to ever run a study of a maintenance regimen in atopic dermatitis with topical. And I would expect we'll present the results at a major scientific meeting. We'll eventually publish the data from that. We hope to have some inclusion in the label as well for atopic dermatitis. And yes, I do think it will affect uptake of the product because, again, it fits with how doctors think about atopic dermatitis. And now we've got the data in the back and saying, yes, you can use our drug, how you already think about it, and this is the result that you're going to get.

Got it. Okay. Great. Thanks for that. Let's turn over to seb derm then. Maybe a question on here is just based on market sizing, market research work that you've done, just size of the opportunity for us because I think it's an indication people are naturally less familiar with versus things like psoriasis and AD. So what do you think, just based on the data you have from your late-stage studies for the foam, what [indiscernible] with population here? And what portion of seb derm patients that are out there that are seen dermatologists could be a good fit for them.

Yes. So in terms of sizing, in the dermatologist office, it's about the size of the psoriasis market. So there's about 2 million patients in the U.S. being seen by dermatologists and being treated topically. There's about 2 million seb derm patients in dermatologists' office being treated topically. All of those patients, frankly, are candidates for ZORYVE foam. The current therapies are not great. Ketoconazole, which is an antifungal, is widely used, but it's not terribly effective. Topical steroids are pretty effective. But as with AD, it's a chronic -- and it's an acute treatment for chronic disease, right? You use the steroid, it clears up. You stop using steroid, it comes back. You're constantly going on and off. But the data from our Phase III suggests, I think we've shown better efficacy than anyone has ever shown an seb derm. And we've got a drug that can be used chronically and anywhere on the body, and frequently occurs in the face. So I think we have a really unique profile, and that's why a lot of excitement. There is so much excitement around seb derm in the dermatology community.

Got it. Got it. And when we think about the initial uptake curve for seb derm, what are some of the nuances we should keep in mind on how it could be similar or different to what we've seen with psoriasis -- ZORYVE in psoriasis, excuse me.

Yes. I think there's certainly some potential for faster uptake in seb derm, again, because of the lack of alternatives and the lack of competition, quite frankly, as well, right? I think the psoriasis market is quite crowded with the biologics and Otezla and Sotyktu and the other topicals. So it's very crowded. AD is somewhat crowded, not maybe as much as psoriasis, but a similar level of intensity. Seb derm there just is nothing, one is currently actively promoting a product. There hasn't been innovation for decades in this space, and there's a very high level of dissatisfaction with existing therapies. So I think the product could do very well, very quickly.

Got it. And then given that there's less competition in the space, do you think there's the potential for like a lower steady-state gross to net versus psoriasis or AD? Or do you think all topical branded derm products kind of fall in that same category?

Well, look, I think at the end of the day, your gross to net is driven by your distribution fees, your pharmacy fees, returns, patient co-pay and then your rebates, right? And the biggest variable in that equation is the rebate. The rebate you have to pay to the insurance companies to get access. We're not going to pay less on the foam and the cream. It would be great, but that's not going to happen, right? Like I said, "Well, you gave me that on that one, so I won't at least that much on this one." But I think because of the approach that we've taken to pricing with ZORYVE, we've been able to attain very good coverage with reasonable rebates, I would say. And we expect to see a similar kind of pattern with the foam.

Got it. Okay. And then my final question for you on reimbursement in seb derm cadence of gross to net compression, would you guide us to think about a similar trajectory to what's been seen in psoriasis?

I think it might be somewhat faster for 2 reasons. The first and probably the most important is that I think that the time to coverage will be faster. And I think some insurance companies view the foam as a line extension, and we'll say, well, we're already covering ZORYVE so now we're covering this ZORYVE 2 done, right? So it would be very quick to get coverage with some insurers. Some of them will want to renegotiate. And so that will extend things. But I would expect overall our time to get the coverage will be faster than it was for psoriasis. And when we got psoriasis, we let them know seb derm and AD were coming, too, so this won't surprise them. I think the other important dynamic is all of the work that we've done from an execution standpoint with the patient access managers and educating the offices on how to get prescriptions process quickly and so forth. All of that work directly translate over to seb derm as well. We're not starting off at [ Square One ]. Again, we get to basically start with seb derm where we are with psoriasis on that date, right? So I would expect that we would see a more rapid evolutionary [indiscernible] with seb derm and the same thing would be true with AD.

Got it. Okay. 2 minutes left. Maybe we can switch over to some of the earlier-stage pipeline efforts. Your alopecia program. Could you just remind us kind of where that sits right now, what the next steps are? What are we going to expect to learn maybe 2024 onwards?

Yes, absolutely. So this is a Phase Ib study with our JAK inhibitor. It's a very unique formulation that was developed in order to deliver the JAK inhibitor into the hair follicle so that they could reach the hair bulk down where the inflammation is taking place. Historically, the topical approach for JAKs and alopecia areata have failed, many people who have done this before many companies have done it before. But we think with this unique formulation, we're in a position to be able to approach a patient group that I think is probably for oral treatment of alopecia areata. I think there's probably a lot of initial enthusiasm for that. But over time for many, many years, I think a lot of people would prefer to be able to switch over and manage that with topically. They have relatively severe alopecia areata. Also for those patients that are kind of more on the mild to moderate end of the spectrum. So I think there's going to be a very strong desire for a product with that profile for a topical of leading systemic exposure. So the Phase Ib study is really generating the safety data to show that this is an approach that works. We will have some kind of biomarker and a little bit of efficacy assessment that's in there, but it's primarily just the initial study for us to understand from a safety profile and PK to be able to move the product forward. And as we were enrolling right now the alopecia areata cohort, we completed a healthy volunteer cohort. And as we get closer to finishing enrollment, we'll kind of communicate further on what the time lines will be for being able to have data from that study.

Got it. And assuming that the patient cohort that data meets your expectations. What is the path forward in this indication look like? And what is the requirement to enable an eventual filing?

We would look to run a larger Phase II trial with a kind of 6-month treatment duration, which is pretty standard for alopecia era. That would be the next step for that program probably.

Got it. Okay. Final 30 seconds. Frank, maybe you could just remind us of your current cash position financing needs, kind of your associated runway do you think a company our current cash position?

Yes. So we ended Q2 with about $270 million on the balance sheet. Shortly after our earnings call, we closed an out-licensing deal with company [indiscernible] in China and brought in another $30 million in nondilutive capital. We continue to work on some other ex U.S. licensing deals and hope to bring in some additional capital via that route. I think the other really important element for us in terms of our cash situation is commercial execution because it generates revenue, right? And it allows us to offset our cash burn. We have not been giving runway guidance and don't -- I don't probably plan on giving it any time in the near future either. But I would say that between a combination of some of these inflows of cash and then also carefully managing where we invest our money, we're looking to maintain a strong balance sheet, we're constantly evaluating whether and how we might finance to come in the future. But at this point, we don't have any specific plans.

Okay. Great. Let's close out with that, Frank. Patrick, thanks so much.

Great. Thanks.

Thank you.