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

All right. Good afternoon, everyone. Welcome to the session of the Morgan Stanley Global Healthcare Conference. I'm Judah Frommer, one of the SMID biotech analysts here. We're very excited to have the team from Arcutis joining us. Let me just get through a quick disclosure before we get started. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. With questions, please contact your Morgan Stanley sales representative. Right. So with that out of the way, Frank, I thought we could start with a brief history of Arcutis. The company is celebrating its 10-year anniversary. So maybe just a couple of minutes on how the team, the pipeline and the commercial effort came together?

Yes. So we just celebrated our 10th anniversary in June, and I have my 10th anniversary in like 6 weeks. I think it's coming out pretty fast. So the company was actually founded by Frazier Healthcare. They saw an opportunity in the dermatology space where there wasn't a lot of innovation happening at that point in time, and they thought that there was a good opportunity. So they created the company. They hired our founder, David Osborne and said, invent a dermatology product. And so David went down in his basement. He literally has a laboratory in his basement and invented what became ZORYVE. And the minute he came up with ZORYVE, they thought, okay, well, we've got a company now. And so they hired a dermatologist and myself and the 3 of us went from there. And over the last 10 years, we've gone from 3 people, and I think we had $150,000 in the bank at the beginning to we're about 450 now and about a $3 billion market cap depending on the day of the week. So it's been an amazing journey. All of it really built on ZORYVE, but we're at a really exciting point now where ZORYVE is generating enough money. We've become a cash flow positive, usually profitable, self-sustaining biotechnology company, and that's giving us the resources now to invest not only in our in-line ZORYVE business, but into expanding the use of ZORYVE and also in building and advancing a pipeline.

Okay. Excellent. That's a great background. So maybe just starting a bit higher level on ZORYVE. How would you describe the product's differentiation maybe across the cream and the foam in terms of both risk-benefit profile, quality of life measures versus maybe topical steroids and then other non-steroidal topical as well?

So I think the difference from nonsteroidal is probably the most important, and Patrick is a dermatologist, he's going to keep me honest. But for inflammatory skin diseases like psoriasis, seborrheic dermatitis and atopic dermatitis, steroids have been the foundational therapy for -- literally for decades, for 70 years, right? It's what dermatologists go to first. And steroids are effective therapies in treating these diseases. The problem is there's this mismatch that steroids are safe for short-term use, and these are all chronic conditions. And so dermatologists had invented these complicated regimens of multiple different therapies, different steroids, different formulations, some non-steroidal all combined together in these complicated regimens to try and manage these chronic diseases with a drug that's really only safe acutely, right? And making trade-offs between safety and tolerability on the one hand and efficacy on the other. With ZORYVE, we really served -- we solve that problem. We have a product that's essentially comparable to a steroid in terms of its efficacy, but it can be used anywhere in the body, which steroids can't. It can be used for however long the patient wants, which steroids can't, and it can be used any amount that they want, which steroids can't. And so that's really -- I think it's revolutionizing the treatment of these inflammatory skin conditions, making it easier for the doctor and for the patients, quite frankly, to manage these diseases and ultimately then producing better outcomes.

Okay. Great. And then just thinking about recent performance for the franchise, Second quarter ZORYVE franchise sales about $130 million, up 23% sequentially. Before we get into kind of back half performance and thinking about that, what's been driving recent trends? The foam sales really stand out in our conversations?

Well, I mean, the foam is a really unique asset, right? ZORYVE itself is a very unique asset. You asked about the other nonsteroidals. We have a very effective drug with no safety concerns and very, very clean tolerability, and we have good access for the product, right? So that combination is very unique. But then you layer on top of that the foam. There are no other nonsteroidals in a foam formulation or frankly, a formulation that is suitable for hair-bearing areas of the body like the scalp, the face, the groin. And we have a foam that is -- it's a very nice foam. People like it, patients like it. You can put it in your hair, you leave it in, you don't have to wash it out. It doesn't disrupt hair style or hair color or anything like that. So that's been a real standout star for us. It's over half of all of our sales is the foam. It also has indications for both seborrheic dermatitis and plaque psoriasis as well. But all of our SKUs are continuing to grow. Atopic dermatitis is actually the newest indication, and we're seeing the highest growth, frankly, in AD, partially because it's new, but also that is a disease that continues to have a pretty high unmet need. And I think the growth is because the product performs really well for customers. I think we have really got our commercialization engine dialed-in, and it's very effective. And again, as I mentioned earlier, we have the resources now where we can invest into new initiatives that allow us to sustain that growth rate or hopefully even accelerate that growth rate going forward. And all of that's happening in a context where, as I mentioned earlier, how foundational steroids were in dermatology, where dermatologists now are questioning the way that they've used steroids in the past and thinking about how they can change the practice of medicine and really reduce the reliance on steroids and steward their steroid usage better.

Okay. Maybe just talk for a minute about kind of market share dynamics and kind of growing that nonsteroidal pie and take share within that versus the...

So broadly on the overall market, we've seen a very nice growth in the branded nonsteroidal market. So we define it ourselves, Topical tapinarof, topical ruxolitinib and topical crisaborole. That was about 2% of the topical market when we launched. We're approaching about 10% now of that market. So a very nice robust growth trend and one that we think will continue on for quite some time. I think this market could easily convert to the 20% -- or 30%, 40% branded nonsteroidals ultimately. ZORYVE was the last of the branded nonsteroidals in that group to launch. And so we started with a very small market share. We're now approaching almost 50% of that market. And again, I think because the product performed so well. So we're really the engine driving the conversion from topical steroids to branded nonsteroidal.

Okay. Great. And maybe just one more kind of high level on broader trends within the space. The more we talk to practitioners, it seems like there is maybe further penetration of nurse practitioners and PAs in terms of prescriptions and maybe just derms and primary care previously?

Well, I mean, I think there's probably symptomatic of two things. One is NPs and PAs are really a very important part of dermatology, right? Over half of medical dermatology is treated by an NP or a PA now. Dermatologists have many other things to do besides [ gen ] derm. And so they tend to shuttle a lot of those patients out of the NPs and the PAs and then do things like procedures themselves. And so that's why NPs and PAs are important contributors. But I think as Patrick's commented before, I think the NPs and the PAs are probably even more receptive to the ZORYVE message as well, right, because of, again, the safety. And some of them are younger, too. And so maybe they're not quite so entrenched in their clinical practices as some of the dermatologists are.

Okay. Makes sense. And on the heels of the second quarter performance, you raised the full year guide to $525 million to $540 million. As we think about the back half of the year and then into 2027, where do you stand on where the franchise could go from here?

Yes. I think actually maybe, Latha, do you want to take that one?

Yes. So yes, we did increase our guidance in the Q2 call, $525 million to $540 million based on our strong performance in Q2 and the investments we're making in the initiative to drive growth for the rest of the year. We talked about a lot of those things in the call. We can elaborate at them here, which is our sales force expansion, our step into primary care, our marketing initiatives, our DTC initiatives and the work that we're doing on the market access side. So with kind of two of the variables done with the quarter and what's left to go, we expect absolute net sales growth in Q3 over Q2, not the same level of growth in a percentage because of the seasonality, which we've talked about with the disease, and I'm sure Patrick can elaborate on that. And Q4 is always our strongest quarter as we end the year and the winter months land themselves for patients to use our products. Stepping into that and all the investments we're making, like I said, we're taking the leverage and being deliberate and being cash flow positive, but investing it in our business. So we expect to inflect that trend, which is that we will increase our growth in '27. When you think of '26 versus '25, we expect to inflect the growth trend in '27 versus '26.

Okay. Great. And maybe it's worth spending a second on that seasonality. I'm always amazed at how surprised the investors are from quarter-to-quarter, topical derm conditions, presumably more severe in the winter, but maybe just worth spending a second on?

Yes. I mean, look, I think I've been in this business for decades and pretty much every product experiences kind of seasonality, right? Q1 is the softest quarter. There's a nice rebound in Q2. A lot of that Q1 softness is driven by patients pulling demand forward in the prior year for their deductibles reset and then their deductibles reset, and we have more co-pay assistance we have to provide. So that impacts Q1. Q2 rebounds. Q3 gets soft because doctors go on vacation, patients go on vacation, there's just fewer doctor visits. And then Q4 rebounds because they're coming back from vacation, but then also they're pulling demand forward from the next year's Q1, right? So you see this very typical sawtooth. And then in the inflammatory dermatology space, inflammatory dermatosis space, Q3 is exacerbated because these diseases tend to improve in the summertime. Patients are outdoors, more sunlight, higher humidity. And so all three of these conditions will improve on their own spontaneously. And so the patients aren't going to the doctors [indiscernible]. And so all of the topical we see this pronounced sawtooth pattern quarter-to-quarter generally every year. We didn't see it last year because we happen to be launching in the third quarter a new indication and that masks that normal seasonality. But this year should probably be somewhat typical. I think the fact that we're growing in absolute terms, Q3 over Q2 speaks to the strength of the underlying growth trend in spite of the seasonality.

Okay. Great. So maybe taking some of those -- through some of those internal drivers. Where do you stand on the dermatology sales force expansion? Are you seeing contribution here yet? Or will we need more time on that?

Yes. So the dermatology sales force, we expanded from 130 to 160 end of May, they hit the field. It typically takes about 3 months to see an effect from a sales force expansion. I would like to see the last couple of weeks were sort of the first green sprouts. We'll see in the coming weeks, but we do expect to see an impact from the expansion in the fourth quarter. And then we also launched the primary care and pediatric sales team in the third quarter. They hit the field at the end of August. So they've only been out in the field for a few weeks. And I think that the time to impact may be extended there because primary care [ desks ] are just a lot harder to get in [ and see ]. So we don't anticipate seeing an impact on -- from primary care and pediatrics probably until '27. But I think that sits with Latha's points about the inflection that we expect to see in '27.

And maybe just remind us why it made sense to bring that sales effort in-house for primary care and NPs and why the timing...

Sure. Yes. We had a partnership previously, and we signed that deal at a point in time where we financially didn't have the wherewithal to do it ourselves. The partner -- we and our partner subsequently decided to part ways mutually amicably, and we were at a point where we could do it ourselves. And so we have started that process. We are doing it in a very measured, methodical way so that we can ensure that we're getting a good return on investment from it. So we started with 20 reps in primary care and pediatrics. I'm sure that will grow with time, but how big and how fast is really going to depend on the results that we can generate from that business. So that we make sure we're doing it in a way that's shareholder value-friendly.

Okay. Great. And I'm going to front run the mini survey we're going to ask you at the end here, but you're leaning into AI to enable prescription workflow and you've begun a DTC effort as well. So any early signs of success there? How meaningful can those be as they ramp?

Yes. So on the AI side, we actually partnered with an existing AI provider that provides workflow AI tools to doctors' offices. We're helping them train their AI model effectively, right? We have heard anecdotally from doctors that they've noticed an improvement in how the system handles our prescription. So that's very positive. And I think over time, hopefully, we'll see more concrete metrics, and we'll share those as appropriate. On the the direct-to-consumer side, we have been doing direct-to-consumer for some time. We started a new partnership with Max Homa, the PGA golfer in first quarter, i think earlier this year. And then I think what was really important was we launched a TeleDerm capability last quarter, where if a patient reads an article or hears about ZORYVE, instead of waiting 6 months to see a dermatologist, they can actually see a dermatologist within 24 hours going through the TeleDerm platform.

Maybe just a second on the TeleDerm platform. I think some folks think that you're running that platform. Just maybe how it works...

Yes. So I think this is really important. For compliance reasons, right, this all has to be an arm's length relationship, right? So if you go to zoryvE.com, there's a tile that you can click and it will take you to the TeleDerm portal. That's an independent company. The patient pays that independent company for the doctor visit. We don't pay the doctor anything. Those doctors work for that platform. They don't work for us. And they don't have to write ZORYVE, right? We're a good choice. And in many cases, they will choose ZORYVE, but they don't have to. And then if they write ZORYVE, then the patient comes back into our system for insurance and fulfillment for the ZORYVE. But the diagnosis and prescription are all completely independent of Arcutis, which is really important from a compliance standpoint that we set it up that way.

Okay. Great. And just higher level for the franchise. I think investors very much appreciate kind of the annual sales guidance you guys started giving, I think, end of last year. But in terms of peak ZORYVE sales you've talked about a $2.5 billion to $3 billion range. I guess there's momentum for the franchise clearly now. And as that continues to build, can you comment on kind of evolving confidence around those targets?

Yes. I think we reiterated it again on the last quarter, we continue to think that the $2.5 billion, $3 billion for our existing indications is a very achievable number. That translates into something like 15% to 20% of topical patients being on ZORYVE versus maybe 3.5% today. And if you think about the momentum we have and this shift in medical practice away from topical steroids, I don't think that that's an unreasonable level of conversion. That would imply probably something like 30% to 40% for the branded non-steroidal class as a whole. And you compare that to similar markets, and that would actually be a low level of conversion compared to a lot of the other markets we see. So we feel very confident about that. And then as we continue to add on these additional indications, that obviously would tend to bring the peak sales guidance up as well.

Okay. Great. And I think both for kind of that peak sales guide, but also for the nearer term annual guide and into next year, we've talked about kind of robust reimbursement. But specifically on government pay, that's kind of evolving. Where do we stand? And where can we see progress coming out?

Yes. So on the commercial side, we have -- we're effectively done, very good coverage, well over 80% coverage on the commercial side and with very good access. We've made very good headway in Medicaid. We have about half of all Medicaid lives have access to ZORYVE through a single step or better. Like in California, there is no step for ZORYVE. And we are starting to make headway in Medicare as well. There's been a lot of disruption in the overall Part D program as many investors are aware, and that's led to a resistance to add new therapies to the Medicare formularies. We were really pleased that we picked up about 1/3 of all Medicare lives earlier this year. We continue to negotiate to get additional plans to add ZORYVE. And we're the only branded non-steroidal on the Medicare formulary right now. So we feel good about that. We have work to do and it's taking time. I wouldn't expect to see any news before the beginning of the year on the Medicare front.

Okay. That's helpful. And then I want to touch on some of the potential indication expansion. So maybe starting with INFANT AD, you have a February 2027 PDUFA for infant atopic derm. So will ZORYVE expand the population here? Or are you competing for patients that already are on Eucrisa? How should we think about that as well...

Yes. Actually, maybe I'll throw that one over to Patrick as a practicing dermatologist.

Yes, one of the challenges in that 3- to 24-month space, it's a fairly large-sized population, even though it's a pretty narrow cut age-wise, just given the dynamics of when patients get their atopic dermatitis, which is oftentimes early in life, they actually represent about 10% of the patients under treatment. It's about 1 million patients that are being seen and managed for their atopic dermatitis. What's challenging about them is that it's really steroids and then as you mentioned, Eucrisa. And in that group, especially when you can't communicate if you're -- whether you're having any stinging or burning, you're already -- we know that the patients are kind of miserable from itching. You can see them scratching. It's been challenging to manage them with local side effects. So I think from our perspective, steroids have been the major treatment because they know that they work. They don't have stinging and burning. The challenge there is that parents generally do not want to be putting a topical steroid onto a 3- to 6-month old. So it's been very difficult to really manage those patients. They oftentimes end up with high frequency in pediatric dermatology offices where they don't really have anything new to offer them. So what we've heard back over and over again is like this 3- to 24-month old because of the lack of nonsteroidal treatments that we can use has been very challenging to manage. So we're excited to be coming there with a profile that they know and is really well suited to this age group.

To put a point on your question, the bulk of the patients are using steroids. So we think the bulk of our business will come from steroids.