Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) Q4 2022 Earnings Call Transcript

Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Ladies and gentlemen, thank you for standing by. And welcome to Arcutis Biotherapeutics, Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please note that today’s conference is being recorded. I will now hand the conference over to your speaker host, Eric McIntyre, Head of Investor Relations. Please go ahead.

Eric McIntyre: Thank you, Olivia. Good afternoon, everyone, and thank you for joining Arcutis’ fourth quarter and full year 2022 earnings call. Slides are available on the Investors section of our website. On today’s call, we have Frank Watanabe, President and CEO; Scott Burrows, Chief Financial Officer; Ken Lock, Chief Commercial Officer; and Patrick Burnett, Chief Medical Officer. During this call, I’d remind everyone that we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. We encourage you to review their information disclosed in our latest SEC filings. With that, I’ll hand the call to Frank.

Frank Watanabe: Thanks, Eric. So I’m on Slide 5 in the deck, which is on our website, if you folks haven’t downloaded yet. So 2022 was really a year of exceptional execution for Arcutis, and it really set us up for great success in 2023 and beyond. Just to recap, we had four successful pivotal Phase 3 trials readout, we had on-time approval for ZORYVE and plaque psoriasis, we raised over $300 million to secure a strong balance sheet to support our continued commercialization and advancing of our pipeline, and we continue to progress in building our pipeline. On Slide 6, we’re making steady progress towards our vision of building one of the biotechnologies leading dermatology companies, some highlights from Q4 and other recent developments.

With ZORYVE, we’ve got an innovative product that’s really well positioned for long-term success with clinically meaningful benefits over alternative treatments. We’re seeing very encouraging script growth as physicians gain positive real-world experience with ZORYVE. And we’re also having great success in obtaining broad, high-quality access. We’re delighted today to announce that we’ve received coverage from the second of the three large major national PBMs effective tomorrow. And Ken is going to comment a little bit more about the access situation, but we’re really happy with our rapid prior and opining broad high-quality coverage for ZORYVE. We also continue to advanced additional indications for Topical Roflumilast Foam capitalizing on what is really turning into a unique pipeline in a product we had the positive readout from INTEGUMENT-1 and 2in atopic dermatitis.

Very excited about the clinical profile in AD and the approvability of the product in a large and rapidly growing market. We also just recently submitted the NDA for Topical Roflumilast Foam and Seborrheic Dermatitis. And that sets us up for a potential approval late this year or very early part of 2024. And we’ve also already submitted a supplemental NDA for ZORYVE and plaque psoriasis down to the age of two, which will further read on the safety profile of ZORYVE and plaque psoriasis. We also continue to progress our early pipeline with the acquisition of ARQ-234, our first biologic for atopic dermatitis and the Phase 1b initiation of ARQ-255 in alopecia areata, which leverages our unique 4D technology and potentially could be the only topical treatment for alopecia areata.

And finally, not only what we accomplish matters, but how we accomplish it matters to us as well. And so we’re very proud that we issued our first ESG report in the fourth quarter, highlighting the progress that we’re making on these important topics. If you move on to slide number 7, just a reminder of our broad and deep medical dermatology pipeline and the progress that we’ve made recently since the last call. On three programs, in particular, I call your attention to the three red arrows, highlighting some of our recent progress in advancing the pipeline with the NDA and Seb Derm, the initiation of Phase 1b for ARQ-255 and the acquisition of and progress on ARQ-234. Turning to slide number 8, there really are four keys to our strategy for the long-term success of ZORYVE.

One is positioning ZORYVE to replace a significant percentage of topical steroids, which we’re going to spend some time talking about today. Secondly, providing a positive clinical experience for doctors and patients when they use ZORYVE; third is obtaining broad, high-quality coverage; and lastly, is ensuring profitable growth through a rapid stabilization of our gross-to-net. If you turn to slide 9, I want to spend just a couple of minutes talking about the first of these four elements of our strategy. The important — and I think it’s really important for investors to understand that the key to realizing ZORYVE’s real potential is the conversion of a significant percentage of topical steroids over to ZORYVE. To give you some context, there are about 12 million prescriptions a year for topical steroids.

That’s something like 25 million every week versus 5,000 prescriptions, maybe 6,000 per week for ZORYVE and the other new non-steroidal combined. So we’re really just tracking the surface in terms of the opportunity for ZORYVE. We believe that there are three critical elements for making that conversion happened. The first one is that prescribers need to see a need, a reason to change and move away from topical steroids. The second is that ZORYVE needs to provide a product profile that satisfies the needs of prescribers and patients. And the third one is it needs to be as easy to rate ZORYVE as it is for their next topical steroid. Thanks. That all sounds great, but is that possible? If you go to the next slide, to slide 10, we’re showing here several different markets where you had a stable, mature and generic market and then an introduction of a new class of drugs.

And what you can see in each one of these instances is that there is a very significant conversion over time as well as some significant market growth actually in a couple of instances, with the introduction of that new class of drugs. And so you’re looking at examples here from the anti-coagulation market, the conversion from warfarin over to factor Xa, the schizophrenia market, the conversion of neuroleptics over to atypical antipsychotics, the GERD market with conversion of H2 to PPI. And then most recently, the conversion of the oral migraine market from triptans over to the oral CGRPs, which is still very early days, but you can see a very rapid conversion trend even in that market. If you go to slide 11, as you look across all these markets, and we’re actually — we were showing also the anti-depressant market and the conversion of TCA to SSRI.

What you can see is over time, there is a very dramatic shift to the new class of drugs and that growth — that shift continues throughout the life cycle of the product. And on average, about 50% of these markets all converted by year seven or year eight after the introduction of a new class of drugs. And when you think about those 12 million prescriptions I talked about, is 50% of that market converted over to new novel non-steroidal, I think that gives you some sense of the true opportunity for ZORYVE. So, if you move on to slide 11 — sorry, I’m on slide 12. So I want to take just a moment and have Patrick comment on the first of these three elements around what we’re hearing from the dermatology community about the need to shift away from topical steroids.

Patrick?

Patrick Burnett: Yes. As Frank mentioned, one key to moving dermatologists from topical steroids to newer non-steroidal alternatives is a recognition within the specialty that a change is needed. Recall last year at our Investor Day held during the AAD, we noted a change in the field regarding the surging interest in topical non-steroidal treatments. This has continued to build, fueled by multiple approvals, including ZORYVE across both psoriasis and atopic dermatitis. The derm community, with KOLs leading from the front, is educating that steroids were fine when there were no other acceptable options, but this has changed with the introduction of the new novel non-steroidals. They’ve noted the changing standard of care and raised questions about the clinical appropriateness of using topical steroids to manage these conditions chronically in the current environment.

Another aspect is patient expectations. This is something we’re hearing from the podium, but I’m also hearing it frequently from doctors, talking to doctors out in the field. Many patients are challenging doctors when they’re presented with a prescription for topical steroids. Finally, we know that there is a movement to update treatment guidelines to reflect the new non-steroidal treatment options, and this is a favorable change as well. So taken together, we have leading dermatologists and key opinion leaders saying from the podium that’s now become hard to justify the chronic use of steroids, given the well-documented risk of steroid side effects, such as stria, atrophy or bone fracture. I’ll turn you over now to Ken Lock to update on the commercial progress.

Ken Lock: All right. Thank you, Patrick. And let me pivot now to talk a little bit about launch progress and the commercial highlights in the fourth quarter of 2022. So moving on to slide 14. You can see our ZORYVE launch continues to build with steady and sustainable weekly prescription growth for our first full quarter of launch. And we’ve continued to build on the first quarter of 2023 here through the typical noise and choppiness related to insurance and deductible resets and a multitude of holiday shortened weeks. We’ve now attained well over 20,000 prescriptions launched to-date with plenty of headroom for continued growth, as Frank mentioned, and our confidence continues to grow every week that we’re providing the best topical treatment solution to plaque psoriasis patients.

Now, as it relates to a core element of driving the conversion from steroids, the ZORYVE profile continues to satisfy the needs of prescribers and patients with exceptional feedback thus far. In particular, prescribers have been favorably impressed by the speed of onset, the ability to treat the toughest plaques not only on elbows and knees, but even on the palms and soles and the world-class tolerability profile that is playing out even more strongly in the real world versus what we saw in our trials. Physicians and patients need to see that the new product is worthy enough to truly become a viable replacement to topical corticosteroids through repeated and robust trial. And we continue to be confident that ZORYVE can deliver on that promise, remembering that prior attempts to replace steroidal agents was disappointing for one reason or another, including lack of sufficient efficacy, tolerability concerns or both.

Moving on to slide 15, our physician intent to prescribe continues to be very strong. This is data from our recent physician ATU fielded a few months into launch, reflecting prescriber intent and prior behavior, contrasted to expected behavior across patient severities and psoriasis. ZORYVE tended use is expected to increase two to threefold across patients severity types in the next six months, all coming at the expense of decreased utilization of the mid and high potency steroids that are associated with psoriasis treatment. This is exactly what we want to see and emblematic of the march towards realizing our full potential. The willingness and intent to move away from the topical standard of care is indicative as ZORYVE is solving real challenges in topical psoriasis treatment.

Tolerability, efficacy, the ability to be used long term and the ability to be used everywhere are hallmarks. Moving to slide 16. This slide gives us a glimpse into what types of prior therapies are being switched from to ZORYVE and a view into the types of patients adopting therapy. ZORYVE is currently playing a broad role. And at the left, you can see that the majority or almost two-thirds of switches to ZORYVE are from a topical corticosteroid or steroid combination product, as expected, as well as an increasing amount from other branded therapies, as you can see in the chart, as well as replacing older inferior non-steroidal agents such as calcineurin inhibitors and vitamin D analogs. As with any switching behavior, the satisfaction with the clinical profile for reasons of efficacy, safety or tolerability remain the key driver of therapeutic switch and is becoming increasingly apparent from our position and patient feedback that this is driving this period-over-period.

Now touching on the third condition that Frank mentioned regarding what’s needed to satisfy a full transition away from topical corticosteroids — excuse me corticosteroids. I’ll now turn to access and reimbursement. On slide 17, we previously stated that one of the key concepts for one product to be as easy to write and obtain as a next steroid is really the minimization physician hassle including step edits and prior authorizations. And we’re pleased to bring new progress along the lines of our stated goal of broad and high-quality access. Now, at the onset, we said that these things, including high-quality coverage, faster formulary adoption, preservation of long-term gross to net and optimizing — optimization for our volume franchise value are important.

Remember that this is the first of four launches for Roflumilast and that our decisions are being made with the lens of enabling strong access across that portfolio of launches, product presentations and patient types. We’ve now secured formulary coverage, not just a contract but coverage at our second or the second of the three large national PBMs effective March 1st, building on the coverage with ESI that we announced at the end of 2022 and at a preferred Tier 2 coverage throughout with no preauthorization and a single-step through a topical corticosteroids same way, which represents the both standard and quality of coverage. Moving to slide 18 taking a deeper dive into the current non-steroidal topical product coverage and at the time of this call, based on our sources, this chart depicts the high-quality differentiated access that compares favorably on both time to coverage relative to launch date and quality in terms of step edit and prior authorizations versus recently other — recently launched products.

Importantly, this for us represents two of the three major national PBMs within roughly six months post-launch, a first-in-category pace and importantly, with no prior authorization, the key tenet of our access strategy. This brings us another step closer toward making ZORYVE easy to write and obtain at the next topical corticosteroids product which is key to fitting in the everyday treatment algorithm of dermatologists. In conclusion, on slide 20, I spoke from our Investor Day last year are the three core pillars to commercial success, anchored by the unparalleled product profile as the foundation. In terms of driving prescriber awareness and use, we’re on the path with over 4,000 unique writers since launch and an aided awareness well over 90% for ZORYVE as per our survey field in November.

In terms of patient engagement and driving patient positive experience, we already spoke to the testimonials daily on the overwhelmingly positive experience at ZORYVE. But in addition, we’ve been continuing to think about how to appropriately accelerate patient engagement in terms of awareness, consideration and request. Especially now as access is coming more fully online, and we want to drive into that. Now we currently have a very active digital social media and DTC campaign in place, but we are rigorously evaluating whether and when, a highly focused connected TV campaign could make sense for ZORYVE. And like any other business, repeat business is the greatest sign of customer satisfaction and our refills continue to escalate, which is a validation of that positive experience.

Lastly, broad high-quality access is coming into focus as discussed. With coverage secured at two of the three major PBMs in just six months post-product availability, remember that the benchmarks suggest 12 to 18 months to secure broad commercial coverage typically. Importantly, the quality of one-step, no prior authorization formulary coverage of our most recent announcement is highly aligned with our goals of obtaining as much prior authorization free access to speed the flow of conversion of legacy products to ZORYVE and making it very easy to fit into the flow of prescribers today. I’ll hand it over now to Patrick for an R&D update.

Patrick Burnett: Thanks, Ken. Starting on slide 21, within the psoriasis community, excitement continues to grow for ZORYVE I want to start with some compelling data that we presented at the Winter Clinical Meeting in January, which was very well received by physicians and KOLs. These are data from our 52-week open-label psoriasis study showing durable efficacy with patients maintaining clear or almost clear that’s an IGA of 0 or 1 for a median duration of about 10 months. Also worth noting is that 57% of patients achieved an IGA 0 or 1 at any point in this two-week trial. I’m really excited about these data. They’ve been very easy to interpret for docs and are particularly important to build momentum as patients are coming back to physicians’ offices with positive experience that gives them a clear picture of what to expect as they continue with their treatment.

On slide 22 now, physician feedback on AD, the data have been very positive. What continues to jump out is the speed of onset in our trials across both psoriasis and Atopic Dermatitis, which gives an early indication that the drug is working in the disease and, of course, the ever important safety and tolerability profile, which has been consistent across all of our programs. Recall triamcinolone, a mid-potency topical steroid is a standard of care in AD. And then INTEGUMENT-1 and 2, ZORYVE demonstrated comparable efficacy the safety concerns from considerable efficacy without the safety concerns through chronic use of topical steroids. Taking a closer look at the EASI-75 data from INTEGUMENT-1 and INTEGUMENT-2 2 on slide 22, we showed statistical significance at week one with clear separation already from vehicle.

Then at week two, about 30% of patients achieved a 75% clearance already. And this continued to increase to over 40% at week four, which was the end of treatment. Keep in mind, steroids work quickly. So these data are exactly what physicians want to see. This gets back to the point about driving physician interest and uptake once this product is approved in Atopic Dermatitis. Turning to slide 23, it’s just a critical element for patients. It’s the most early — most important early indicator for AD patients for them to know whether or not the drug is working. And here again, we showed statistical significance in separation already at week one, building nicely to nearly a-third of patients by week four. Looking forward, we’ll showcase some exciting daily itch data at the AAD in a few weeks, which will really nicely characterize the early onset of action of this drug within the Atopic Dermatitis.

On slide 24, I want to touch briefly update, because safety and tolerability are so critical for this disease, which has a substantial proportion of pediatric patients. This table shows rates for the adverse events in high of our two Phase III trials to have a 2% or greater incidence in any arm. Not looking to go into any detail here. These are just data that we have shown previously. Just key takeaway is to highlight the favorable safety profile, which is consistent with our other programs, including psoriasis and given that AD is a disease with a skin barrier defect as a key part of the pathophysiology. These patients tend to be sensitive to local adverse events with topicals and many agents irritate the skin in individuals with atopic dermatitis.

Here, again, I think we’re reaping some benefits from our formulation, which avoids contact irritants like propylene glycol. Finally, turning to slide 25. I have some of our accomplishments and upcoming milestones. You can see significant sustained long-term growth potential with additional approvals label expansions, both within the US and outside as well. I’m very excited to highlight our Seb Derm NDA submission earlier this month, which puts us with a potential approval in late 2023 for the SebDerm foam formulation. Here physician excitement is palpable for the foam formulation. We’re hearing a lot about it when we’re talking to Derm’s out in the field, but largely, this is being underappreciated, we think, by Wall Street. Coming back around to our most near-term milestones, we have the action date with Health Canada at the end of April for psoriasis.

Then next, we have a lot going on in atopic dermatitis in the second half of 2023, the submission of our sNDA for ages six and above in AD as well as top line data readout for the INTEGUMENT-PED study. Again, very excited about Roflumilast cream clinical profile NAD, which I shared with you today, especially the rapid onset of action, and we see this as a significant opportunity for ZORYVE in this large and growing market. Q4 is the anticipated approval date for the sNDA in psoriasis in children down to the age of two, which Frank mentioned earlier, and finally, we plan a submission for foam for the scalp psoriasis in the first quarter of 2024 after an anticipated SebDerm approval. On that note, I’ll turn it over to Scott.

Scott Burrows: Thanks, Patrick. Turning to Page 27 of the slide deck. Net product revenues were $3 million for our first full quarter of launch driven by ZORYVE steady growth in unit demand. Our gross to net discount rate improved modestly in the quarter and continues to be meaningfully better than other recent branded topical launches at similar time points. Looking ahead to the first quarter of 2023, we are very pleased with the continued steady week-over-week growth that we can all see in the weekly script data and today’s new payer formulary coverage announcement bodes well for further volume growth. We do expect first quarter revenues to be impacted by the typical higher pro-paid program cost that most commercial products experienced in the first quarter of every year, leading to temporary erosion mid-Q1 gross net discount rate.

Given this dynamic, first quarter net sales may not be meaningfully higher than the fourth quarter as our continued demand growth is offset by the higher gross-to-net. We believe that this is just early launched noise. As I just mentioned, we have been growing precisely and beyond Q1, we expect the additional formulary coverage we announced today, combined with the earlier Express Scripts announcement to drive continued volume growth as well as improved gross-to-nets. We continue to believe that we will achieve a steady-state gross-to-net around 50% and potentially sooner than is typical. This will translate into more meaningful revenue realization through the balance of the year and into future years. Turning to the fourth quarter P&L on Slide 28.

Research and development expenses were $34 million in the quarter. The decrease year-over-year is primarily due to lower clinical development costs for our topical Roflumilast programs. We expect R&D to tick up slightly in Q1 versus Q4 and then be relatively stable for the balance of 2023. SG&A expenses were $37 million for the quarter, increasing largely due to higher commercialization expenses for the ZORYVE launch. We expect some sequential growth in SG&A, as we continue to invest in the psoriasis launch and prepare for our potential launches in seborrheic dermatitis and atopic dermatitis. Net loss was $72 million for the quarter, flat to Q4 2021. Turning to our final slide on Page 29. We provide some key balance sheet and cash flow items.

As a result of the financing as Frank mentioned, our balance sheet remains strong with cash of approximately $410 million as of December 31. Our capital allocation priorities remain very targeted in 2023 prioritizing, of course, the ZORYVE launch in plaque psoriasis as well as preparations for the upcoming potential launches in seborrheic dermatitis and atopic dermatitis; and finally, the continued advancement of our pipeline, specifically our topical JAK program in alopecia areata and our CD200R program in atopic dermatitis. This concludes the financial update. I’ll now turn the call back to Frank to wrap up our prepared remarks.

Frank Watanabe: Okay. So I wanted to thank everyone for joining. I know we covered a lot of material in very short order. So at this point, we’re going to transition to a Q&A. And so I’ll turn it over to Eric.

Eric McIntyre: Olivia, we can open the line, please.

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Q&A Session

Operator: Certainly. And our first question coming from the line of Vikram Purohit from Morgan Stanley. Your line is open.

Vikram Purohit: Hi, good afternoon. Thanks for taking our question. So two from our side. So you provided some color about the profile of patients being prescribed ZORYVE, but I was wondering if you could speak about how they’re receiving the treatment from what you’re seeing, has it mostly been monotherapy so far, or are they getting it in combination with other options? And then secondly, pivoting to atopic dermatitis, assuming approval in that indication for roflumilast cream, how do you think gross to net could trend in that indication? And how would you compare and contrast the trend line for gross to net there versus what you’re seeing with psoriasis? Thanks.

Ken Lock: Hey Vikram, this is Ken. Thanks for the question. So as it relates to specifically patient types or mono and combination therapy. So from the source of business lines, you can see that primarily, it seems as though the predecessor therapy is a single therapy. However, in the field, we also see lots of instances where physicians are doing what they normally do with topicals, which is adding them on to the back of a biologic. And while not specifically indicated for that use case, we’re obviously not contraindicated for that either. So we’re seeing a mix of that. Now remember, biologics and Ducentis is only a fraction of the overall market. So anywhere between about 20%, 25% at most our patients are on systemic and that would represent the maximum combination use, but monotherapy is largely the situation in which people come from topical corticosteroid and/or alternative onto our products.

So I’d say, we don’t have the data to put in front of you quite yet in terms of the exact monotherapy combination or combination percentages, but monotherapy would be — based on my knowledge, the most common use case.

Vikram Purohit: Are you talking about AD gross to net?

Scott Burrows: No, we expect AD gross to net trends to come on with coverage.

Ken Lock: Thank you. Sorry, I thought that was a question for Scott. So sorry, the question regarding AD, gross to net. So one of the things as we’re negotiating and you’ll see is that we do expect with some payers, obviously, synergistic relationships between current coverage for psoriasis and future indication. So while not consistent across every payer within each agreement, there are stipulations in which some cases, the assets would transpose on to the next indication, but other instances would require new negotiations. Now that being said, one of the benefits of those coming downstream of psoriasis and having done the legwork going into the psoriasis launch is that the familiarity and so the clinical performance of the products are already understood.

And so a lot of that time being spent socializing that with peers, demonstrating the value proposition, et cetera, we’ll have already been accomplished, and then we’ll be talking about the new indication. So I expect there should be some truncating of that overall lead time as we move from indication to indication.

Vikram Purohit: Understood. Thanks a lot.

Ken Lock: Yeah.

Operator: Thank you. One moment for our next question. And our next question is coming from the line of Seamus Fernandez from Guggenheim. Your line is open.