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

Good day, and welcome to the Arcutis Biotherapeutics Roflumilast Foam FDA Approval Conference Call. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to Derek Cole, Arcutis Investor Relations. Please go ahead.

Thank you, Chris. Good morning, everyone, and thank you for joining us today to discuss the FDA approval of ZORYVE topical foam for seborrheic dermatitis. Slides for today's call are available on the Investors section of our website. On the call this morning, we have Frank Watanabe, President and CEO; Patrick Burnett, Chief Medical Officer; Todd Edwards, Chief Commercial Officer; and John Smither, Chief Financial Officer. I'd remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all of the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that, let me hand the call over to Frank.

Thanks, Derek. And welcome, everyone. Thanks for joining us this morning. So I'm on Slide 5 in the deck, and, excuse me, Friday's approval of ZORYVE foam is the latest step in our process of laying groundwork for long-term growth of Arcutis. Very excited about the approval of the foam on Friday. It's the second product that we've had approved at Arcutis in less than 18 months with ZORYVE cream obviously being the first one. With regard to ZORYVE cream, we see continued momentum behind the plaque psoriasis launch. You probably all have noticed in the last couple of weeks, there's been a very nice upward trend, and we continue to have confidence in the growing momentum of that launch. And I think given the similarities of the 2 products in the labels, there's going to be some positive interactions between those 2 products. Beyond the cream and the foam, the FDA did accept our supplemental NDA and assigned a PDUFA date of July 7 for our filing of roflumilast cream 0.15% in atopic dermatitis in children 6 and above and adults. And we also are ready to file for the 2-year to 5-year olds as soon as we get that approval. We'll talk a little bit more in detail on this in just a minute. But as we've discussed in some of our prior calls, we are expecting over the next 12 months roughly a tenfold expansion of the patient opportunity for ZORYVE in its various indications and formulations, which we believe will drive significant revenue growth. And in Q3, we also continue to strengthen our capital position with the follow-on financing as well as the milestone from the Huadong out-licensing deal, and we continue to make progress on the China business development deal as well. So with that, I will move on to Slide 6, and this is slightly different than what you've seen previously, and I'll call out why that is. But you can see now with psoriasis and seborrheic dermatitis to the far left, commercial patients in the dermatology setting, we have an addressable market of about 3 million patients. That number has gone up because to our pleasure, the FDA approved a label for ZORYVE foam and seborrheic dermatitis without any limitation on severity. And so that expanded the market opportunity for us in seborrheic dermatitis. There's another about 1.5 million patients in atopic dermatitis, commercially insured and treated by dermatologists that we expect to pick up later this -- next year with the approval of the cream in atopic dermatitis. And then as we've mentioned previously, we are making good headway on securing Medicare and Medicaid coverage, which is slightly more than 3 million more patients in the dermatologist office. And then finally, on the right, you'll see, again, about 7 million patients, and that number is up because of the revision to the Seb Derm label in primary care and pediatric setting that we expect to be able to access through our primary care partnership, which we are actively pursuing. So in total, over 15 million patients in the addressable market as we expand indications and insurance coverage throughout 2024. On Slide 7, I believe very strongly and Todd will go in a little more detail about this as well as Patrick, that ZORYVE foam is really very well positioned for success in seborrheic dermatitis market. As you saw in our Phase III studies, we have shown, I would say, unparalleled efficacy in the treatment of seborrheic dermatitis, particularly itch, which is one of the most bothersome symptoms for patients. Our product being monotherapy and once a day dramatically simplifies treatment regimen, and Patrick will talk a little bit more about what patients are having to deal with today. We have as with the cream very, very good tolerability, which allows a chronic use of the drug for a chronic disease versus some of the other treatments, which are fine in an acute setting, but aren't really safe for use chronically. We expect that vehicle because of the way it's formulated will enhance compliance to leave in, again, once a day, won't disrupt patient hairstyle. So this is quite a significant step forward for patients. And as Todd will go into more detail, we expect a very broad high-quality coverage for ZORYVE foam at launch, and we anticipate that we will have profitable prescription growth right out of the gates because of that, and Todd will go in a little more detail in just a few minutes on that. But before we get into the commercial aspects of the launch, I'd like to turn things over to Patrick Burnett, our Chief Medical Officer. Patrick?

Thanks, Frank. There hasn't been a new drug approved with a new mechanism of action in over 20 years for patients with Seb Derm. So there isn't a lot of familiarity for many with this disease, even though dermatologists, as Frank mentioned, treat just as many patients with Seb Derm as they do with psoriasis. So with that in mind, and starting on Slide 9, I'm going to give a brief overview of how this disease affects patients. Importantly, Seb Derm is a form of eczema, but it's not the same as atopic dermatitis. So it's important to kind of keep that relationship in mind. Seb Derm is associated with itchy red patches covered by greasy flaking scales and occurs most often in areas with oil-producing or sebaceous glands, and which what gives the name seborrheic dermatitis. And we can see from the pictures on the right, this impacts the scalp, the face, especially the central face, including, as you see in the patient in the upper right-hand corner, the areas around the size of the nose and then extending oftentimes into the eyebrows and oftentimes kind of connecting the scalp and that the frontal portion of the scalp at the hairline to the central face. Now itch is an important driver of the quality of life burden. And when thinking about the substantial impact on quality of life that we've identified in this patient group, it's related to both the symptom of itch, which is similar to AD and psoriasis, which I'm sure you're familiar with, but also the clinical signs of redness and erythema and the greasy adherent scale, which presents primarily in areas that are visible, as I mentioned, like the scalp, the hairline in the central face. So this is a disease that carries a social burden for patients. And I think that these images really capture it well. Patients commonly describe the feeling that they have poor hygiene and are perceived as being dirty. And I think if you look at the scalp where you can really see clearly that adherent scale that it's clear to see why patients have such a large impact on their quality of life. Moving on to Slide 10. As a form of eczema, it's been shown that the skin barrier is disrupted in seborrheic dermatitis, similar to what we know of AD, although the disease are distinct from each other. So it's important that our vehicle is able to deliver the active ingredient without disrupting the skin barrier and thereby worsening the condition. We'll see some evidence for this in our studies when we observe the vehicle response, and I'll show those in just a minute. Importantly, haircare practices vary significantly between men and women as well as between different races and ethnicities. Our foam formulation is a good fit regardless of these differences, including frequency of hair washing because it's not drying or greasy. It only needs to be applied once a day, and when applied to the scalp, it doesn't need to be washed out like a shampoo. What we'll discuss later is that many of these patients use a large number of over-the-counter treatments as well as prescription medications, including some shampoos and oftentimes, these aren't really fit for purpose for different types of hair and how they're cared for. Importantly, our steroid-free once-daily foam for use on all hair and skin types is available for any duration. And as Frank mentioned, our safety profile really is well suited for chronic treatment of this chronic disease. And taken all together, so the ZORYVE foam effectively clear seborrheic dermatitis and is a simplifying treatment for patients with Seb Derm. Moving on to Slide 11. Our FDA-approved label supports broad use. I'll talk about our data in just a moment, but we studied moderate to severe patients, but the approved label includes mild, moderate and severe and were approved for patients down to the age of 9, and our itch data were included in the label and I'll cover those in just a minute. And this once-daily treatment, as I mentioned, is really well suited for being able to give patients a simple treatment that they can use chronically for this chronic disease. Moving on to Slide 12. So turning now to our Phase III STRATUM data, STRATUM was one of the two studies supporting safety and efficacy in the label. And in this, as I mentioned, patients with moderate and severe seborrheic dermatitis were randomized 2:1 active versus vehicle for an 8-week treatment. The primary endpoint in the study was IGA success with the Investigator Global Assessment being a 5-point scale from 0, which is clear, all the way to 4, which is severe, and patients had to be a 3 or 4, that's moderate or severe to be enrolled, and IGA success represented a patient achieving a clear or almost clear or a 0 or a 1, okay? So that's patients coming in as a 3 or 4, and then they needed to be moved to clear, almost clear for our primary endpoint, which was IGA success. What you can see at week 2, when looking now at the graph on the left of Slide 12 is already after just 2 weeks of treatment, over 40% of patients reached IGA success, and this number just continued to increase to almost 80% of patients by the time we got to week 8, meeting statistical significance along every one of those week 2, week 4 and week 8 endpoints. So now turning to the right where we can see a higher bar, which is IGA of clear. So these are patients that started at moderate or severe, and they have no evidence of seborrheic dermatitis on their skin anymore. So they have no erythema and no scaling. So these patients already at week 2, we had 16% of patients to this very high bar, which is complete clearance of the disease, increasing to 35% by week 4 and half the patients had no evidence of disease in the study by the time they reach the end of treatment, which was week 8. On Slide 13, we present the itch response in STRATUM. Remember that itch is a major driver of quality of life and impacts patients with seborrheic dermatitis quite substantially. We've got a robust impact that gets started rapidly after treatment has started. Itch was assessed in the -- with using a WI-NRS, which is Worst Itch Numeric Rating Scale. This is the same scale that we used in atopic dermatitis and psoriasis. And it's a scale from 0 to 10. WI-NRS response was assessed in patients with a baseline itch of 4. So coming into the trial that patients had to have at least a 4 to be included in this endpoint and a responder is a patient who improved by at least 4 points over the course of treatment. And again, a rapid response was observed with almost 1/3 of patients, meaning WI-NRS response already at just 2 weeks of treatment, and by week 8, this number had gone up to almost 63%. So we're having a major impact not just on the signs of the disease, erythema and scaling, but also on the primary driver of quality of life, the burden which is itch. Moving on to Slide 14. We have 2 representative patients, at the top left, on the top, we have a Caucasian woman with central erythema and scale. You can see at baseline, this is a patient who is moderate and improves to almost clear by week 2 and then maintains that by week 8. One of the things I like about this patient is it really shows that even though this [ region ] has a substantial improvement and they were a success, they are considered almost clear, and that just shows that it's very, very difficult to get a patient to completely clear because as I mentioned, they can't have any evidence of the disease on their body at that time. And below, we show a patient who is an African-American woman with tightly coiled hair, and she's demonstrating very characteristic hypopigmentation of the hairline along with erythema and scaling. And what we wanted to show with this patient is that we see resolution of that hypopigmentation over the course of treatment. This is a patient who gets all the way to completely clear by week 2 and then maintain that through week 8, but the hypopigmentation continues to resolve between week 2 and week 8. Moving on to safety on Slide 15. We see low and balanced adverse event rates. So TEAE is a treatment-emergent adverse event. Those are the AEs that happened after patient initiated therapy. Those are low and balanced between ZORYVE and vehicle. And subjects to discontinue the drug due to an adverse event over the course of many of our studies, we've pointed to this as a key indicator of tolerability. You can see that, that number is actually lower with ZORYVE relative to vehicle. And sometimes you see that if patients are not getting the response that they're looking for is vehicle. So we were happy to see that kind of split between active and vehicle. Moving on to Slide 16. And here, I'm showing the most common adverse events occurring in greater than 1% in any group. The first thing you could see as you just kind of scan down is it the -- is it -- is that many of these are either balanced between active or vehicle or actually imbalanced in favor of vehicles. So for instance, urinary tract infection is slightly higher in vehicle. Application site pain is only 1 patient on ZORYVE and 3 patients or 2% in vehicle. Sometimes the way this is an aspect of the disease that if it's not treated adequately, patients will have application site pain and burning. So it's actually a very good sign that we had such a low rate for that in our active treatment. The only imbalanced adverse event that we had in our favor was nausea with only 5 pains or -- patients or 1.6% on active. So a really good continuation of our adverse event profile similar to what we saw in psoriasis and very supportive of the drug being able to be used first line for treatment of seborrheic dermatitis. So with that, I'll turn it over to Todd.

Great. Thank you, Patrick, and good morning, everyone. I'm very enthusiastic about the ZORYVE foam approval for seborrheic dermatitis, and I'm looking forward to the tremendous opportunity that lies ahead. It is great to be speaking with all of you today to provide a brief commercial overview. So moving to Slide 18. To prepare for this launch, we have been listening to the patient, talking to their clinicians and dermatologists using their ideas and insight about what is really happening to these patients every single day to understand how we can offer a solution. The patient ACP tell us about the significant negative impact seborrheic dermatitis has on their everyday lives and the survey show it too. These patients speak of their frustration with the lack of convenient and effective treatment options. They talk about how the impact on their lives and well-being is real. Over 90% of patients cited that their seborrheic dermatitis negatively impacts their social life and their social interactions, and 77% cited their Seb Derm symptoms causing anxiety and 47% have missed work due to their symptoms. And these patients are frequently seeking options from their health care providers, who have been without anything new that is effective. And for the health care providers who treat these patients, they have limited hope to offer them and are eagerly awaiting more innovative treatment options to offer their patients. There is a significant unmet need for both patients and providers, and we are excited to bring ZORYVE foam to market as a highly effective once-daily monotherapy product. Now moving on to Slide 19. There has not been a novel product launch for seborrheic dermatitis in over 2 decades. The current standard of care is suboptimal. It is generic topical steroids and ketoconazole, mostly shampoos for maintenance use and steroids for inflammation and flares. And patients are dissatisfied with these onerous treatment options. And moving to Slide 20, when surveyed, they shared that on average, they use 6 products a week to treat the seborrheic dermatitis. This includes prescription and OTC treatments as well as other alternative treatments. These treatments can be time-consuming, disruptive to daily schedules and impractical. As such, patients find it difficult to be compliant with their prescribed regimen and would be more likely to stick with the treatment plan if meant using fewer products. And with no convenient and effective treatments available that provide long-term disease control, the dynamics are favorable for rapid adoption of ZORYVE foam. There is a ready pool of patients seeking novel nonsteroid treatment options. And with dermatologists, there's an opportunity to leverage the positive experience in psoriasis for those already prescribing. So now moving on to Slide 21. As we launched ZORYVE in this unique foam preparation, really the optimal vehicle for these patients as described by Patrick. Adding to that a once-daily application and then the rapid clearance and significant reduction in itch that can be used on all affected areas of the body and of course, is safe and well tolerated, we are talking about a product with several unique attributes that set it up to be the new standard of care for patients. It is a remarkable opportunity to serve Seb Derm patients with ZORYVE foam. And on Slide 22, you can see that there are approximately 9.7 million patients diagnosed with seborrheic dermatitis. And of that 9.7 million, 6.9 million are treated with a prescription product and 4.1 million are treated at derm office. And on average, a dermatologist sees 75 seborrheic dermatitis patients a month. And as mentioned earlier, there was no limitation of label on severity, so there is a large population of patients eligible for ZORYVE foam. Now turning to Slide 23. Arcutis is ready to launch ZORYVE foam and Seb Derm. Our ZORYVE commercial team is well established in dermatology and dermatologists see our field sales organization team as trusted partners. The past experience with ZORYVE cream for psoriasis patients will be a springboard. The foam will be available in pharmacies by late January at the same list price as the cream. In setting patients up for access, we have 2 national PBMs already covered in the foam as a line extension to the ZORYVE cream contracts. Most importantly, we have been listening, listening to what a Seb Derm patients want from a new therapy, and we believe that ZORYVE foam can be that solution. So now I'll turn it over to Frank.

Okay. Thanks, Todd. So with that, that concludes our formal presentation, and we'll now transition over to Q&A.

[Operator Instructions] Our first question will come from Tyler Van Buren of TD Cowen.

Congratulations on the landmark approval. So a couple. First, what else needs to be done to make the product available by the end of January? And then the second is, I understand that 2 of the 3 major PBMs are [Technical Difficulty] line extension. But what do you need to do to get the third PBM online, so prescriptions from those patients can be sold?

Okay. Yes, sure. Tyler, good to hear from you. I'll take the first one, and then I'll ask Todd to talk about the PBMs. So we literally just got the label on Friday. So as with topicals in general, there are some work to do just around supply chain, getting those products finalized with the approved label and then getting them out in the distribution channel. I think we also are very attuned to making sure that the product has been listed in the compendia and appears in the e-prescribing -- major e-prescribing databases so that it's easy for doctors to write and for patients to get those prescriptions fulfilled. But other than that, really, it's just the logistics of getting the launch ready. And then with the Christmas holidays, obviously, we didn't feel like late December, early January is the optimal time to be launching a product. And then, Todd, can you maybe take the question around the PBMs?

Yes, absolutely. So as mentioned, 2 of the PBMs, we have the ZORYVE foam, where we cover the line extension of ZORYVE cream contracts. We are in -- having an active, very positive dialogue with the third PBM. And I'm very confident that we'll have access to that third PBM when we launched ZORYVE foam.

Mr. Van Buren? [Operator Instructions]

Yes.

I'm sorry.

I was just saying thanks for those answers. Appreciate it.

[Operator Instructions] Our next question will come from Seamus Fernandez of Guggenheim Securities.

This is [ Colleen ] on for Seamus. Congrats on the approval, and thanks for taking our question. You had a clear strategy for the government pay market with responsible pricing of the products. But could you remind us of the opportunities in the Medicare, Medicaid market within each indication, how that may be involving and just any update on timelines? And then additionally, how do you expect expansion into the government pay market to impact gross to net going forward?

Sure. Yes. Todd, do you want to take those?

Yes, absolutely. So relative to Medicare and Medicaid, actively -- as mentioned -- Frank mentioned, actively working to secure access both on Medicare and Medicaid. We expect to start to bring Medicare online by mid-2024. This will be sequential because, as you know, the Part D plans are managed by the PBMs. And so as we are able to successfully garner contracts with them and create that access, that will come online. But as mentioned, expect that to do so mid-2024. Relative to Medicaid, actively working there. And we're working with each unique state other than the states that work with a contracting entity, which are 2 separate entities that control several of the states, and we expect to be able to start to gain Medicaid access in the first half of 2024. And then the second part of that question, if we was relative to gross to net, is that correct?

Yes.

Yes. Relative to gross to net, as you -- as I mentioned, we're launching at position of strength relative to gross to net, and what do I mean by that is with the line extensions for ZORYVE foam, when we launch, we'll be contracted and be able to rapidly have uptake with covered prescriptions, which will have a positive impact on our gross to net, unlike launching a new entity into the market that will not be new to market blocks, we'll have covered prescriptions and expect to have a favorable ZORYVE foam gross to net at launch thereafter.

Yes. And then the one other thing, I think, Colleen, you asked was about the opportunity size. So Seb Derm and AD are roughly about half government and half commercial. And Seb Derm is a little bit less than half, but it's a very sizable portion, especially Medicare in Seb Derm and then Medicaid, especially in atopic dermatitis just because of the different demographics. Psoriasis is a little bit less. It's maybe around 30%. So the Medicare, Medicaid opportunity is big for all 3 indications, but particularly important for seborrheic dermatitis and atopic dermatitis.

[Operator Instructions] Our next question will come from the line of Uy Ear of Mizuho.

Guys, congrats on the approval. A quick question. Frank, could you talk about your couponing strategy for those who may not be -- have formulary coverage? That's the first question. And secondly, could you also talk about the incremental expenses that the launch for [ Intel ]?

Sure. Yes, Todd, do you want to maybe take the couponing question, and then John, can you address the incremental expense?

Yes, absolutely. So relative to the coupon, so we'll be offering the same coupon program for ZORYVE cream for psoriasis as we will for the ZORYVE foam for seborrheic dermatitis. We want to make certain that this is a very seamless and efficient process and so we'll have the same program for both. Relative to patients that may not have access to the product, if there is a downstream payer or something that hasn't yet put the product on formulary, we do have a noncovered program, and those patients will need to pay a $50 co-pay and then we'll have access to the medication. So we want to make certain whether covered or noncovered, once that provider prescribes the medication that we can get it into the patient's hand and have that noncovered program for $50.

Uy, this is John. What we expect for 2024, actually, we think our total OpEx will be pretty flat compared to 2023. However, you'll see a shift going from R&D to commercial, given that we've got 2 launches coming in 2024. So you'll see SG&A go up but R&D come down.

Okay.

And I think, Uy, just to your question as well, I think it's important to point out, as Todd mentioned, we don't anticipate needing to expand the sales force to launch in Seb Derm, and so any incremental expense really is just related to marketing programs. And since these call points are essentially the same doctors, there's a lot of leverage for us in having Seb Derm and psoriasis approvals.

[Operator Instructions] Our next question will come from the line of Vikram Purohit of Morgan Stanley.

This is [indiscernible] for Vikram. We have one question, and then we're wondering how many [ cans ] of product would you expect an average patient to work through in a year? Do you anticipate episodic use as patients experience flare or more continuous use?

Sure. Yes. Patrick, do you want to take those?

Yes, absolutely. So noting in our studies that the body surface area here is slightly lower. Well, I would say not slightly, it's lower than in psoriasis, just given the distribution mostly on the face, the scalp and then somewhat on the body. We anticipate the number of cans to be somewhere between 2 and 3. So it will be less than what we've been seeing in psoriasis. And with regard to episodic use, what we would anticipate is that patients would reduce the use of the product as it is that they see improvement. And at the first time that they're starting to see some of their seborrheic dermatitis return or they have any symptoms, such as itch that they would restart using the product. And with that kind of use, what we saw in the long-term treatment of seborrheic dermatitis is that patients didn't really get into a flare situation. That's one of the aspects of Seb Derm that I think is a little bit different than some other diseases. This shares a pattern somewhat more like psoriasis. So in real world, what we would anticipate is patients would kind of over time decrease their use and then anywhere that they saw a new disease emerging or symptoms, they would restart it.

[Operator Instructions] Our next question will come from the line of Sean Kim of JonesTrading.

Congratulations. Just a couple of questions from me. So I guess first question, can you speak to the level of enthusiasm among patients and prescribers for ZORYVE foam and your expectations for the speed of market uptake in Seb Derm? And I guess second question relates to the expenses. So any additional DTC campaigns that you're looking to expect to launch for Seb Derm? And another question that I have is, you mentioned about the significant overlap in terms of the prescriber base for Seb Derm. So can you quantify for us how many additional new dermatologists that you're looking to target for Seb Derm?

Sure. Yes, I'll address the enthusiasm question. And then, Todd, maybe if you could talk a little bit about expected uptake, expenses and then the overlap. So I think, Sean, it would not be an understatement to say that there is a great deal of excitement around this product, not only in patients, but also in physician offices. I get out in physician offices very frequently as just Todd and Patrick. And the foam is, this is the thing that they want to talk about the most when we go out and talk to doctors. As Patrick mentioned, it's been decades since they've had a new product, and this is a dramatic improvement over what they have currently. And there's a very high level of excitement amongst prescribers. And we know of doctors already who are identifying patients who they expect to put on ZORYVE foam just based on the anticipated approval. I would say for the patients who have used the product in our clinical trials, that excitement is also very, very high. We've seen postings on social media, which has created some buzz amongst the patient community about this new option and how dramatically different it is and the efficacy it is that they've seen. So we think there's going to be a lot of excitement. This is a fairly motivated patient community. And so we think we will spread fairly quickly. And then Todd, can you maybe address the uptake speed, the expenses, especially DTC and then the overlap of doctors?

Yes, absolutely. So relative to uptake, as I mentioned earlier, there's been no branded promotion within this product. There's been no innovation within 2 decades. And so these patients, as Frank mentioned, are very eager for new solutions, especially highly effective solutions that are monotherapy once a day. And so this ready pool of patients, we expect rapid uptake of ZORYVE foam. These patients once again are eager and have been anticipating the approval and launch of this product. Relative to overlap, approximately 9,100 prescribers -- excuse me, health care providers who provide -- prescribed ZORYVE cream. So there's already a large base of prescribers, and there's a significant overlap relative to the prescriber base for ZORYVE cream for psoriasis and ZORYVE foam for seborrheic dermatitis. And so we will not need to add a significant number of targets to our current prescribing base for ZORYVE foam. And then relative to expenses and DTC, as mentioned, there's no need to expand the sales force. We have appropriate coverage there with the call plan targets. We will engage patients directly. We want to activate patients, make certain that they're keenly aware that ZORYVE foam is available. And so there will be, as mentioned, some nominal expenses for marketing for a very, very targeted DTC campaign.

Thank you. And I'm seeing no further questions in the queue. I would now like to turn the conference back to Frank Watanabe for closing remarks.

All right. Thank you very much, Chris. I appreciate it. And thanks to everyone for calling in early this morning. Very, very excited about the upcoming launch, and we'll make sure to keep you all posted on the progress as we move forward. So have a great day and appreciate your questions. Bye-bye.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.