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

Okay. All right. Welcome, everyone, to this session of the Morgan Stanley Global Healthcare Conference. I'm Judah Frommer. And before I welcome the team from Arcutis, I'll just read a quick disclosure statement. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that, we've got Frank, Latha, and Todd here. So for those newer to the story, maybe we can start with a minute or 2 of introduction to Arcutis and the commercial trajectory of ZORYVE thus far.

Sure. So Arcutis is a 9-year-old biotechnology company focused in the medical dermatology space. We created the company out of recognition that there weren't a lot of people in med derm doing innovative stuff and there was a lot of unmet need. So we saw a big opportunity founded the company. And our first product was -- or is a drug called ZORYVE. We had a cream that was approved for plaque psoriasis in 2023 -- 2022.

August 2022.

And then we've subsequently -- we had a foam approved then for seborrheic dermatitis in early '24. We had a different version of our cream approved for atopic dermatitis in middle of 2024. We just recently had the foam was also approved for scalp and body psoriasis, and then we're expecting another approval for another version of our cream for young kids with atopic dermatitis in October. We've got another program in the pipeline, and we continue to look at expansion of ZORYVE as well. Product is really performing very nicely. It's very effective on par with a high-potency steroid, very well tolerated, very safe. So you can use it anywhere in the body for any duration, and we have very good coverage. And as a result, in the branded topical space now, we have well over 40% market share. We're the leading branded topical in the marketplace.

Great. So with that background, maybe staying high level, how can investors be thinking about prospects for ZORYVE cream versus the foam, ultimate commercial potential for each of those high-level addressable market?

Todd, do you want to take that?

Yes. For ZORYVE cream versus the foam, we expect that there will be continued growth across both formulations. With the ZORYVE foam and the recent launch for psoriasis patients, approximately 50% of them has scalp involvement. Prior to the launch of ZORYVE foam, there were minimal viable treatment options within the space, primarily just a steroid solution. So we brought significant innovation relative to the patients that needed a treatment for their scalp psoriasis. The other is offering both a foam and a cream -- ZORYVE cream 0.3%. We now get choice optionality to the provider of patients, which is a significant differentiator.

Okay. Great. And how would you characterize the launch of the foam in scalp psoriasis? Could you see eventually providing sales breakouts by indication as we move into the future?

Yes. We're very pleased with the launch. We've continued to -- we saw a robust uptake relative to the foam, and we would anticipate that it's that indication that we actually anticipate is because both the seborrheic dermatitis and scalp psoriasis are on the same SKU. So for us to be able to break out the volume within that SKU, it's going to take some time to be able to get enough longitudinal data to be able to give directionally what the uptake is by indication.

I'm sure as we get more clarity, we'll share that with the Street.

Okay. That makes sense. I think coming out of second quarter earnings, seasonality is a word that's come up a bunch in our conversation since you provided that third quarter sales guidance. So maybe you can just remind us of expectations for the overall franchise performance in Q3 versus Q4 this year and kind of dynamics that are played between the two of those?

Yes, sure. So seasonality, I think, is a fact of life really for any prescription product. Summertime, people go on vacation, doctors go on vacation. And then to compound that, the inflammatory dermatosis that we treat, seb derm, AD, and psoriasis, all tend to improve in the summertime when it's hotter, it's more humid and people are out in the sun. There's just a natural course of the disease. And so that amplifies the seasonality. We said at the end of Q2 -- so we had 28% top line growth in Q2, about 13% volume growth in the U.S. in Q2. We said that we would see growth in Q3, but it would be moderated. Somehow people didn't hear that right and thought that we were saying we weren't going to have growth. I never said that. But I think what we've seen so far actually is that we've been able to sustain growth through Q3. I think we're sitting around 13%, 14% growth in units so far quarter-to-date, which given the seasonality that I mentioned, I think it's really robust growth, and I think it's probably a reflection of the continued progress with the AD launch as well as Todd mentioned the uplift that we saw in the foam with the scalp and body approval.

Got it. If only there were a transcript of what you said.

Yes, right. I have actually -- I may have said to a few investors go back and read what I said, read my lips. And then we would expect Q4 to be even stronger. There is a fairly predictable phenomenon of, again, patients refilling towards the end of the year before their deductible resets. I'm guilty of that too. But then also the reverse seasonality as it gets colder and dryer and people are inside more and the heat is running, these diseases tend to flare more. And so there's more opportunity to switch patients as well.

Okay. I don't know if this was in your Q3 explanation, but docs seem like they go on vacation also.

Every once in a while, they do go on vacation.

All right. Maybe we can spend 2 minutes on your COA partnership and general trend with primary care doc prescribing and how it could impact the back half of the year and beyond maybe just a little history on the partnership and how it's shaping up thus far.

Yes. We initiated a partnership with COA promotion within primary care and pediatrics given there's a significant opportunity there for ZORYVE. With the promotion, within primary care, it's a longer selling cycle. There's minimal time that the representative has and being able to educate a prescriber on ZORYVE. So it takes a high level of frequency, which drives that longer selling cycle. But nonetheless, we're seeing some encouraging signals, meaning that we're seeing the rate of adoption of ZORYVE is starting to recently increase here. And for those prescribers that do adopt, we see them continue to expand their utilization of ZORYVE. One thing that was a lesson learned for COA was relative to the prescription fulfillment process and making certain that we create simplicity and efficiency in that process. And so recently, we have now a dedicated specialty pharmacy will process those prescriptions and help offload the burden of the PA process from the office. And we're starting to see uptake within that specialty pharmacy that's encouraging.

Can you help us with an idea of kind of where patients are seeing for the indications you are approved in kind of derm versus primary care versus peds? Is there a way to break that down?

Yes, we can break it down with the IQVIA data. We can break it down by specialty that greatly informs us relative to the utilization across derm, ped, and primary care.

And so as you think about it, psoriasis is predominantly seen in dermatology, right? Very little pediatrics and then there is some primary care. AD is a lot of non-derm, both pediatric and PCP. And then seb derm, there's a fair bit of non-derm, but that's predominantly in PCP because it tends to occur post puberty and the older you get, the higher the incidence, but across the three indications, it's about a 50-50 split derm, non-derm, and most of the non-derm is primary care and pediatric.

Okay. That makes sense. And even thinking kind of beyond, if we're just thinking about total scripts per prescriber, would you characterize the franchise is still kind of early phase focused on expanding prescriber breadth? Or how would you characterize kind of signs of maturation and deeper prescribing amongst existing prescribers?

We see maturation within the breadth. Like in Q2, we had 18,000 providers that prescribed ZORYVE. So our goal now is to really drive depth, and that's depth as far as adoption of the portfolio because we see in the data that the prescribers that do adopt the portfolio exponentially prescribe more of each unique product than if they're writing that product alone. So to drive the depth within the prescriber base that we have established today.

Especially in dermatology.

Absolutely in dermatology.

Primary care is probably still more.

Yes, just the opposite, it's breadth in primary care to impact the number of prescribers.

Got it. So if they've started with cream and maybe are adding foam on top of that in terms of scripts written, you're seeing kind of both of those pick up over time. You don't see them kind of gravitate towards one or the other for some reason.

No, we see it as you mentioned over time.

Yes. And I think Todd's talked about this on a number of the calls. I think one of the most important things is you think about it, if you go from writing 1 version of ZORYVE to writing 2 versions of ZORYVE, it doesn't double, it triples. And if you go from writing 2 versions of ZORYVE to 3 versions of ZORYVE, it doesn't double again. It goes up 3.5-fold, right? So there's this exponential growth as doctors adopt it more probably because they're just writing more ZORYVE and it's kind of front and center in their mind.

Yes. And I guess just in terms of doc feedback and kind of level of comfort with the product, I guess, how much does safety versus efficacy? Is it equal balance between the two?

I don't know exactly what the split is between the two, but this drug doesn't have an issue with either one, right, so which is nice. Todd and I were out in the field with our Chief Medical Officer 2 weeks ago, I think for the entire week visiting probably 100 customers, and the feedback is just outstanding, right? It's a very efficacious drug. What we hear is it's very efficacious. It's very predictable, right? When they give a patient ZORYVE, patient is going to get better, there are very few nonresponders and they never get callbacks on side effects or safety issues. And I think the other thing is the doctors who are using it don't complain about access being a challenge either. So across the board, the feedback has been extremely positive. And that's very consistent. We spend a lot of time with customers, and we rarely hear any complaints at all.

Okay. Great. I guess just speaking of access, kind of the only place we get questions is Medicare Part D, which you guys have talked about. This is not specific to you guys or your products. But I guess, how would you elaborate on what's kind of in your control versus not in Part D coverage?

Todd, I'm sorry...

Medicare Part D?

Yes, Medicare Part D, okay, we continue to have dialogue and discussions with the Medicare Part D plans. As mentioned, there's been a kind of a -- it's been a protracted process due to the provisions within the IRA that did the cost shifting to the patient once they meet the maximum out-of-pocket cost. But as the Part D plans continue to do their modeling and to make decisions on their formularies, we're having deeper discussions, and we anticipate that it could be likely that we were able to gain access on a couple of the Part D plans come first of the year. It's still in negotiations, but we're getting close to being able to do that and to open that door up in the Medicare Part D segment.

Okay.

And if you look at Medicare, Medicaid versus commercial, it's about a 50-50 split.

So as -- I think the other aspect of the story that comes up with coverage is pricing, gross to net. How do we think about gross to net stability? I think you've talked about relative stability thus far. But as we think about expanding coverage into government payers, is there potential to move the needle on net pricing? Or should we expect that, that stays relative?

Yes. So what we've commented on is for -- we expect the gross net in 2025 to be in the 50s. And we -- that's for the whole portfolio, and we think that will sustain into the future as we have negotiated and added contracts, including Medicaid and commercial, and that 50s also contemplates Medicare. So the net price improvement comes from, I think, volume and staying in the 50s despite adding all the contracts that we just talked about. So that's where you see the pull-through. And at the same time, we've taken a very moderate WACC increase over the course of years, and we pull that through as well. So you'll see that come through over the course of time.

Okay. That makes sense. You guys have an October PDUFA for the cream, 0.5% in 2- to 5-year-olds. How should we think about that opportunity? And what would you highlight as next priority registrational indications? I think you talked about the sNDA for the 0.3% cream in kids, but what should we think about as coming next?

Yes. So as you said, we're expecting approval for AD 2 to 5 in October, just about 5 weeks away. I think that's important for a couple of reasons. The first one is there's a clear unmet need in those younger kids. I think there's a growing anti-steroid or steroid phobia in the general population, but that's particularly acute amongst parents and fear of using steroids in their kids. And so what we hear from clinicians is that parents are coming in all the time saying, "Hey, I don't want to put my kid in the steroid. What do you have aside of steroid?" There aren't a lot of options for those kids. So we think that's an important indication. Secondly, I think it's an important halo on the overall ZORYVE AD brand that were approved down to age 2. We're already approved down to age 6, but that will be an important second step to help the overall franchise. After that, we have filed for psoriasis down to age 2 as well. We have not gotten an action date yet, but I would anticipate it's about 10 months from now, right, because we just filed the sNDA. And then we're currently running a study of ZORYVE 0.05 in 3- to 24-month old. Again, an area, I think, of especially high need for nonsteroidal. A lot of excitement about that study in the pediatric dermatology community. And we haven't finished enrolling yet, so we don't have time lines, but that study is enrolling very well, and we would expect that's something that won't be that far off. Beyond the 3 to 24 months, we announced at our Q2 earnings call that we've started running some additional Phase II studies in new indications with ZORYVE, we've got trials ongoing right now in HS and vitiligo. I would anticipate we might start a couple more in 2026, looking at other indications. And then based on the results from those studies, I think it's likely that we will pursue further indications for ZORYVE beyond our current indications as well.

Okay. And just sizing the AD opportunity in 2 to 5 versus where you are currently?

Yes. So about half of all AD patients are under the age of 18 right? A good chunk of those patients are under the age of 6. Peak onset is in the ages of 1 to 5. But beyond the absolute numbers, I think, again, the proclivity to use a nonsteroidal is higher, the younger kid gets. So we might see outsized penetration in those younger kids as we go forward.

Okay. That makes sense. Just getting back to COA, is there any messaging that needs to change with an approval in younger kids? Or is the messaging likely the same effect?

Very much the same other than it's not approved.

Okay. Makes sense. And you mentioned HS, vitiligo, potentially other indications. I guess given the broad range of indications under consideration, can you give us kind of a peek under the hood in terms of internal criteria that determine whether a disease progresses to formal clinical development? Are these commercial or scientific [indiscernible]

It's a combination of the two, right? We talked on the Q2 call, I think dermatologists love to use drugs off-label, right? That's just what they do. Most of the drugs they use are for off-label use. And so they got hold ZORYVE, and they're like, wow, this is great. I'm going to try it here. I'm going to try it there. And we've got like 42 diseases now that's worked. We're not going to pursue all of them. Many of them are just too small, right? There are these rare worsening conditions where ZORYVE works and doctors will either get it through medical exception or they'll use samples. But there are some very large indications. So certainly, opportunity size is important. A degree of unmet need is also very important. And then we want to see a very robust data from the Phase II study suggesting that we're better than current standard of care. The combination of those three would make something interesting enough that we might pursue it as an indication. I think the other facet would probably be clarity of regulatory pathway. Anytime you're adopting -- going after a new indication, it becomes more challenging with the FDA versus something like HS or vitiligo, where there's already established products and you know what the regulatory inputs are going to be.

Okay. That makes sense. And obviously, some of the indications are kind of newer to market. But can you give us a little bit of a history lesson on therapy duration by kind of product breakdown? Are there things being put in place to improve life cycle management? Just how is duration of therapy kind of trended thus far and what happening.

So all three of our currently approved indications are chronic diseases, unfortunately. I won't say lifelong, some children do outgrow AD. And seborrheic dermatitis sometimes has a later onset. So there are age differences across the disease. But generally speaking, these patients are going to be on these drugs chronically. And this is a drug that people seem to stay on very long. So I think it's early days still, but persistence seems to be very good on the drug. And then, Todd, do you want to maybe just talk about some of the things that we're doing to help with patient retention?

Yes. With patient retention, we're making sure that we have reach out to every unique patient relative to making sure that they get their refill of that prescription. The other is working with the dermatologist to make certain that they understand some of the clinical data that we have, especially in AD relative to long-term therapy and where they can move to twice weekly versus once a day to make the product more convenient for that patient to help that process.

I think we had said even prior to the launch that we expected patients to go through about 2 to 3 units a year, either a can or a tube. And the data that we're seeing shows that patients are exactly where we expect them to be around 2 to 3 years.

Okay. That's helpful. And you've guided toward cash flow breakeven by 2026. I think what are the most important significant -- the most significant levers or milestones we should be thinking about to get there? Is it just continued execution on the existing business? Yes, anything you can point us to in terms of kind of tracking the progress there?

Sure. So I think you nailed it, the key is the execution on the business. So revenue is the primary variable of getting to cash flow positive, and we stand by getting to cash flow positive in 2026. The thing that we've discussed with the Phase II life cycle management, our pipeline advancement of ARQ-234 and continuing to focus on ZORYVE is all contemplated in that statement of being cash flow positive. So we are very judicious with the cash or I'm the gatekeeper of the bank. So we want to make sure that we are investing for the growth of ZORYVE. That's the primary driver of the balance sheet and advancing the pipeline like we talked about between life cycle management, ARQ-234, all fostering the revenue growth. So those are the key variables. So nothing milestone per se. It's just that we continue to execute and meet some of the things that Frank and Todd talked about.

I mean I think the only wildcard in that equation, right, would be a significant business development. And as we've said repeatedly, we're always active in the business development arena. I don't see business development as an imperative for our company given everything else that we have going on. It certainly would be nice to have an asset, but I don't need to do a deal. And so while we're always looking, we have a very high bar. And we're really only going to acquire an asset if we feel that it's a compelling asset and it's something that we can create shareholder value with.

Okay. That makes sense. Maybe just last one, a high-level strategy, right? There are some large pharmas you go up against in this space. I guess, what's the competitive advantage of being kind of a smaller, maybe more nimble player with more focus on your asset than maybe some others?

Yes. I would say we really actually don't compete with the large pharmas. The biggest company we compete with probably is Incyte, which is a middle-ish company. The biologics and the systemic therapies, we're actually complementary to not competing. Most of those patients are on a topical and ZORYVE is a great option for them, right? But I think -- so the competitive dynamic for us is really the other branded nonsteroidals and then most importantly, steroids, right? And the competitive advantage there, I think, first and foremost, is you can use ZORYVE anywhere for any duration. and you don't have to worry about any of these safety issues, right? That is not true for steroids. They're very good short-term drugs. They're safe in the short term, but they can't be used chronically, and there's many parts of the body where they can't be used. So patients end up in these very complicated regimens. They're changing medications, using multiple medications. We're able to solve for all of that. And we don't have the safety concerns that the topical steroids have. We're also once a day, which none of the steroids are, which I think makes a big difference as well. And then it's in a very patient-friendly formulation, especially the foam, but the cream as well. And that's also a differentiator versus the steroids.

Okay. Great. Anything we missed that you guys would highlight about the story?

I think covered all the topics.

Yes.

All right. Then I will -- if there are any questions in the room, certainly raise your hand. We have some mics here. But I'm going to move into a mini survey that we're asking all of the biotech companies at the conference, no pressure. Don't feel intimidated.

Hopefully, this isn't about the NFL.

So biotech does seem to be more exposed to external and macro factors of late. So like I said, we're asking each of the management teams these three questions. First topic, maybe less relevant for you guys, but you'll tell me, China's rise in biotech innovation, is that affecting your competitive position in any way? Could it influence R&D internally or potentially business development?

Okay. It is not affecting us. We have used China as a source of innovation in the past, [indiscernible] our JAK inhibitor came from China. But we're not aware of any competitive threats from a competing product standpoint coming out of China. I think there's a bigger macro issue for the biotech sector, but not really something that affects Arcutis per se.

Okay. Helpful. Second theme is AI. How would you say Arcutis leverages AI kind of from any perspective within your business? And how are you thinking about AI's potential to disrupt the industry, both positively and negatively?

That's a good question. I get this question a lot. I'm probably a little bit of a contrarian on AI. I think that AI has the potential to dramatically revolutionize drug discovery, right, the early stages of drug discovery. We don't do drug discovery. I'll just say that upfront. I've been involved in drug discovery in the past, but we don't do that at Arcutis. We, I would say, are intrigued by AI, and we're always looking at potential use cases for AI. But so far, we haven't found a widespread application and nor do we see it as really disrupting the way that we practice. Probably where we're bumping up against it more than anything is actually in the practice of medicine, right? Insurance companies are using AI. Now doc's offices are using AI, right? They're using it to streamline some of the work processes, and that has some secondary effects. But I would say at this point, we don't anticipate big impacts from AI on our business. So that may change. It feels a little bit to me like dot-com to be honest.

I hear you. And then lastly, maybe more impactful to your business here, just the regulatory side of things. You have frequent interactions with FDA kind of given the follow-on indications you guys are consistently going for. But changes at FDA, MFM pricing, tariffs, anything else on the regulatory side you highlighted?

So I'll start with FDA. I would say that our interactions with FDA from the outset have been very constructive. We have not seen at Arcutis any real changes in those interactions. I think CBER has been more effective than CDER. And I think things like the accelerated approval pathways have been more challenging, right? We don't have an impact from any of that. And I think the dermatology division has been good partners for us all along. From a tariff standpoint, our primary manufacturing site is actually in the United States. So that cushions us a little bit. I think we still have to see what comes out of the 232 investigation. But I'm not anticipating that tariffs are going to be a major factor for us either. And then with regard to MFN, the only other market that we market ZORYVE is in Canada, and our Canadian price is pretty good. It certainly is not U.S. list price, but they're very different marketplaces. We'll have to evaluate how things go with MFN and what that actually looks like. We did not get a letter yet. We're a little too small for that. So I think it's still to be determined what MFN looks like, but I think it should be an inevitable risk for us as well.

Okay. Great. If there are no questions in the room, I think we'll call it a day.

Okay. Thanks a lot. Great talking to you.

Thank you.