Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good day, and thank you for standing by. Welcome to Arcutis Biotherapeutics Q1 2023 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. [Operator Instructions] Please note that today’s conference is being recorded. I will now like to hand the conference over to your speaker today, Eric McIntyre, Head of Investor Relations. Please go ahead, Eric.

Eric McIntyre: Thank you, Marc. Good afternoon, everyone, and thank you for joining Arcutis’ First Quarter 2023 Earnings Call. Slides for today are available on the Investors section of our website. On today’s call, we have Frank Watanabe, President and CEO; Ken Lock, Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and Scott Burrows, Chief Financial 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 the information disclosed in our latest SEC filings. With that, I’ll hand the call over to Frank to kick us off.

Frank Watanabe: All right. Thanks, Eric. So I am on Slide 5 of the deck, for those of you who are following along in the deck, and provide a high-level overview. During the first quarter of the year, we made strong progress in laying the foundation for sustained long-term growth at Arcutis. I’ll start with ZORYVE, our innovative product for plaque psoriasis. We believe this product is very well positioned for long-term success with the real potential to eventually replace topical steroid. And physician and patient feedback has been exceedingly positive, and the launch continues to build momentum. We’re seeing encouraging script growth as physicians gain positive real-world experience with ZORYVE. We roughly doubled our TRxs quarter-over-quarter in Q1, and we see continued growth in April.

I think it’s worth noting that we’re at the last five branded topical launches have seen growth stall somewhere between three and six months into the launch. We have now continued steady growth through nine months of our launch. We also continue to make progress on gaining broad high-quality access for patients to ZORYVE. We now have coverage at two of the three large PBMs as well as a number of other large downstream health plans within just six months of our launch, and we’re making good progress with the remaining large PBMs — PBM, excuse me. We have now over 110 million commercial lives, which is about 2/3 of the commercial market. And I think it’s important to note that over 90% of those patients have access to ZORYVE without a prior authorization, which meets our goals for high-quality access for ZORYVE.

We believe we should be able to get to over 80% commercial coverage before the end of 2023 and likely even sooner than that. I will note that while obtaining coverage is a necessary precondition for patients to gain access, it is not alone sufficient. And we are augmenting our field deployed forces to increase our pull-through of that coverage into covered prescriptions, and Ken will talk a little bit more about that a little bit later. At the same time, we’ve made continued progress on regulatory milestones to expand to additional indications and geographies with topical roflumilast. We received a confirmation of our PDUFA date for the foam in seborrheic dermatitis in mid-December, which is setting us up for our first launch of the foam. We believe this product is massively differentiated, and there’s a very high level of physician excitement around this product and a very high sense of customer urgency for this product given the unmet needs in this area.

We also recently received the approval of ZORYVE cream in Canada for plaque psoriasis. And the launch in Canada is going to be in the next coming couple of weeks. Obviously, it’s a smaller market than the U.S., but we still think it’s a very attractive opportunity. And this represents the first regulatory approval for ZORYVE outside of the United States, which is another key milestone for Arcutis. We also had a presentation of late-breaker data from the INTEGUMENT-1 and INTEGUMENT-2 trials in atopic dermatitis at the American Academy of Dermatology meeting in March. We continue to get very positive physician feedback on the clinical profile in AD, especially the early onset, including the impact on itch in as little as 24 hours, which was presented at AAD, as well as the differentiated safety and the tolerability profile, which is particularly important in atopic dermatitis.

And we expect to file for approval in ages six and above in atopic dermatitis late in the third quarter or early the fourth quarter of this year. We also just recently completed enrollment in the INTEGUMENT-PED study in ages two to five, and we expect to see top line data from that study in Q3. I would note that that will be a supplemental NDA, so that data is not a critical path for the aforementioned filing late Q3, early Q4 in six and above. Really, so that we can capitalize on this incredible opportunity, we are adjusting our capital allocation priorities, and we’re making some specific adjustments to drive success in our commercialization efforts, and Scott will provide some more details on that shortly. Turning to Slide 6. I think topical roflumilast really represents — you hear this word a lot, but a pipeline in a product with potentially four unique products in one and multiple inflection points coming up ahead with potentially new launches every two or three quarters for the next several years.

So with ZORYVE today, we’re competing in a market of around 2 million topically treated psoriasis patients in dermatology offices in the U.S. The total TAM, the TAM effectively doubles in size with the expected approval of seb derm to more than 4 million patients in the dermatology office in the U.S. And then the TAM will nearly double again to almost 7 million patients in dermatologist’s offices with subsequent launch in AD, and then there’s nearly as large an opportunity outside of the dermatology office with about 6 million additional patients being topically treated outside of dermatology offices, mostly in primary care and pediatrics. We do plan on a capital-efficient partnership to allow us to access this broader opportunity outside the dermatology office rather than building our own sales team.

When you factor in all of these different opportunities, that’s a six-fold increase over our current psoriasis market that we’re targeting at the moment with ZORYVE. And I think that really speaks to the long-term potential of topical roflumilast and Arcutis in the space. We think that the topical roflumilast product profile is ideally aligned with what physicians and patients need and are looking for. And as I mentioned before, the catalyst path really sets us up very nicely for a potential new launch every two to three quarters with seb derm at the beginning of 2024, atopic dermatitis later in 2024 and then scalp and body psoriasis early in 2025. And with those introductory remarks, I’m going to turn things over to Ken.

Ken Lock: All right. Thanks, Frank. If you’re following along, I’m now on Slide 8. So moving to commercial performance, our launch momentum continues to grow with steady prescription growth built on the back of the exceptional feedback that we’ve been receiving on the product profile. As Frank mentioned, we’ve nearly doubled the TRx volume quarter-over-quarter and grown new prescription growth by nearly 80% with continued positive momentum into Q2 on both fronts. We continue to hear exceptional feedback on the product profile of ZORYVE from physicians and patients alike. And in particular, the rapid efficacy, the effectiveness in treating the most difficult plaques, even on the palms and soles, in addition to the sensitive areas, and physicians are seeing very little, if any, tolerability issues associated with the product.

On Slide 9, we take a deeper dive into what’s driving our continued growth through the lens of market research. Dermatologists’ preference for ZORYVE has grown substantially as positive patient feedback and clinical experience builds. On the left is a look at longitudinally, physician preference on ZORYVE growing over time. We believe the consistency of the profile for ZORYVE is truly shining through. As expected in the early days of launch, prescribers were trialing both new products with the majority expressing no clear preference. As clinical experience has built, more and more of these same physicians are shifting preference to ZORYVE, and in the most recent wave demonstrating a doubling of preference since we began measuring this in November of 2022.

Unsurprisingly and consistent with what we hear in conversations with customers every day, ZORYVE’s tolerability and safety profile lead the way in terms of the reasons for product preference. This has followed very closely and importantly by our absolute efficacy and speed of onset. It’s critically important to continue to have physicians gain confidence in topic roflumilast as we look to launch additional indications as their current experience and perceptions will significantly shape the reception of our future launches. On the right-hand side of the slide, we take a closer look at the new prescription trend, which is reflective of critical brand choice in the moment. And for ZORYVE, we continue to show positive trajectory. This can be thought of as a leading indicator and a platform for repeat business.

We believe the momentum is just getting started as preference takes hold and prescribers select ZORYVE increasingly often for their next eligible patient versus other alternatives. As Frank mentioned, other recent granted topical launches have not seen the ability to sustain that launch growth trajectory through nine months, so we’re very encouraged by what we are seeing here. On Slide 10, the next slide depicts here the source of business for ZORYVE from launch to date. And we’re very encouraged as our volume grows that 2/3 of our business continues to be sourced from topical steroids and steroid-containing combinations with the balance coming from mix of older nonsteroidal products, such as vitamin D analogs and topical calcineurin inhibitors, as well as a very healthy portion of competitive branded products for plaque psoriasis.

We continue to position ZORYVE to convert a significant percentage of the topical steroid market. That is really where the long-term opportunity remains in psoriasis, as with all of our subsequent indications. Moving to the next slide on Slide 11. We have continued to unlock the requisite broad high-quality access for ZORYVE that will drive further unit demand, revenue realization and gross-to-net improvements. And as Frank mentioned, now approximately nine months into launch, we have 2/3 of the commercial lives covered in the U.S. and well over 110 million lives. Importantly, over 90% of these 110 million or so are actually covered without a formal prior authorization requirement, which is critical to facilitating the long-term conversion from steroids by making it as easy to write that next — sorry, as easy to write ZORYVE as that next steroid — instead of that next steroid.

So on the right side, just a recap of our historically stated access and coverage goals, anchored by our responsible pricing strategy. Firstly, preservation of long-term gross-to-net, which I’ll speak to more in detail in a moment. The second is to optimize for both our volume and our franchise value. Speed — specifically, gaining access to government payers and avoiding specialty peer and coinsurance thresholds with our future indications is important because there’s a larger government paid demographic with those indications. Thirdly, obtaining high quality coverage with the minimization of step edits and prior authorizations. And we’ve also now begun to see differential coverage emerge across national PBMs and health plans compared to topical derm competitors.

Depending on the payer and plan, these branded competitors are seeing higher out-of-pocket cost to patients as a result of tiering, incomplete adoption across formularies, imposed quantity limits and requirements for formal prior authorizations. And lastly, faster formulary adoption, which we have seen play out thus far with the major payers. Now, circling back to the gross-to-net aspect. While we’ve made extraordinary progress on securing formulary coverage, we need to now push down execution to the office and pharmacy level to ensure appropriate reimbursement. It has taken us longer than expected to convert that coverage to paid prescriptions, and this must change. We have seen — also seen some delays in terms of coverage implementation at the downstream plans and some pharmacies still running our covered patients as uncovered in our copay program.

We believe we’ve diagnosed these underlying causes, and we are taking a number of specific steps to improve this as we continue through launch and gain more payer coverage. For example, we’ve increased our field-based footprint focused on reimbursement support and pharmacy education to enhance coverage pull-through and further partner with dermatology offices on the specific criteria needed in order to drive covered prescriptions. We are encouraged by the improvement in translating coverage to paid prescriptions in certain regions of the country where we’ve already implemented these measures. and the trending of copay cost reduction over the year as we more broadly address some of these key dynamics. Now, we’ve also felt the effects that most manufacturers typically see in the first quarter, which are insurance plan changes, deductible resets and higher coinsurance populations year-over-year, which drive our copay offset cost up.

Now we expect this to improve as we move throughout the year. But importantly, and above all, we are securing the payer coverage necessary to build the foundation to meaningfully convert the topical steroid market with ZORYVE. So Slide 12, in conclusion, I want to revisit the three core pillars to commercial success that we’ve spoken about in the past that set the foundation for sustained ZORYVE growth. Driving physician awareness and expanding our prescriber base, we’ve now seen over 6,000 unique writers since launch. And this has grown approximately 50% since the last read where we showed in Q1, commensurate with our volume growth. And while our breadth is growing nicely, there’s still plenty of headroom for our targeted HCPs to experience the benefits of ZORYVE.

Now with respect to the patients, we are receiving testimonials daily on a positive experience with ZORYVE, and refills are growing very nicely, contributing now in excess of 20% to TRx each week in April and reflective of the confidence that our writers have to continue prescribing. We also, as our coverage improves, are continuing to evaluate the right time to supplement our current DTC efforts by way of highly targeted means such as connected television. And lastly, we continue to build on our broad high-quality access as discussed with coverage secured at two of the three major PBMs and the quality of that coverage meeting our hurdle of minimizing step edits and prior authorizations. So at this point, all of our indicators and measured launch metrics, prescriber sentiment and awareness and patient reception, continue to point upwards.

We continue to learn and adjust our tactical approach in order to maximize the number of patients that receive the benefit of ZORYVE. And with the foundational elements largely in place, we look forward to delivering on the long-term promise of ZORYVE. I’d like to now pass it to Patrick for an R&D update. Patrick?

Patrick Burnett: Thanks, Ken. I want to touch on our atopic dermatitis and seborrheic dermatitis programs briefly before updating on upcoming milestones. As investors are aware, AD is a key opportunity for topical roflumilast, and physician feedback on our AD data has been very positive. And what continues to jump out is the speed of onset in our trials, which gives a clear early indication that the drug is working, and of course, the ever important safety, tolerability data that are a key aspect of the product profile. Consistent with this is our itch response across all indications. Itch is particularly a critical element for patients with AD. Atopic dermatitis is often referred to as the itch that rashes, and is the most important signal for AD patients to know that a drug is working early and an important indicator of clinical response.

So looking at Slide 14, as Frank mentioned, we presented these exciting daily itch data at a podium presentation at the recent American Academy of Dermatology meeting. This is a great commentary on the early onset of action for roflumilast. We show a statistically significant improvement in itch just 24 hours after the first application of drug and then again at all time points thereafter across both of our pivotal Phase III trials. This profile aligns well with the unmet need in the market. And this kind of early response of symptoms is exactly what patients and HCPs want to experience when initiating treatment in atopic dermatitis. Switching to our foam program, now on Slide 15, and our first indication to seborrheic dermatitis. The recent FDA acceptance of our application is yet another major milestone for the Company, and we’re looking forward to the December PDUFA for an anticipated approval.

Excitement is intensifying in the physician community based on the strength of our topical roflumilast data and because they have so little to offer these patients currently, keeping in mind that there are just as many patients in derm offices with seborrheic dermatitis as there are with psoriasis. Roflumilast foam would be the first topical drug for seborrheic dermatitis in decades. So a reminder on our Phase III data. Here we are again on Slide 15. We’re showing a very strong early response with over 40% of patients with IGA success already at week two, which increases to 80% IGA success at week eight, and that was our primary endpoint. And this tracks — looking at the graph on the right, this tracks to 50% of patients going all the way to completely clear at eight weeks.

We as well showed a significant impact on itch, which is a major symptom of seborrheic dermatitis as well as AD, but we haven’t included those data here, although they have been presented. These absolute efficacy levels are unheard of for a topical. Just to note that these data are from our registrational Phase III study, but they replicate the impressive data from our Phase II study that was just published in the Journal of the American Medical Association. Again, this is with the foam formulation, and we’re hearing that this formulation really aligns well with patient needs in the space and provides a strong competitive differentiation. I’ll finish up my update on the R&D progress with a summary of our milestones on Slide 16. Taken together, these represent an opportunity for significant, sustained, long-term growth with additional approvals and expanded geographies as well as label expansions.

Highlighting just a few of these now, showing continued regulatory execution with our recent Canada psoriasis approval. Not just to contextualize the importance of this for patients in Canada, this is the first nonsteroidal approved there in over 25 years. Canada played a central role in our development of ZORYVE. Over 1/3 of all clinical trial participants came from Canada. So lots of familiarity with ZORYVE already there and excitement within the derm community for Arcutis. Moving on to atopic dermatitis. We updated our sNDA submission timeline to late Q3, early Q4 this year. That will include ages six and above, as Frank mentioned. We also announced last week the completion of enrollment of our INTEGUMENT-PED trial. That’s ages two to five years.

And our top line there, as mentioned, is expected in Q3 of 2023, Q3 of this year. That’s going to be an important data set for our differentiated profile in atopic dermatitis. So thanks for the chance to update you on our R&D progress, and I’ll turn you over to Scott for the finance update.

Scott Burrows: Thanks, Patrick. Turning to Page 18 of the slide deck. Net product revenues were $3 million in the first quarter, in line with our prior guidance. Strong unit demand growth, which doubled sequentially, was offset by the anticipated higher gross-to-net in Q1. As Ken discussed earlier, Q1 gross-to-net was higher quarter-over-quarter due to the typical first quarter insurance deductible resets and the dynamics in getting our prescriptions covered by insurance. We expect gross-to-net will improve through the balance of 2023 based on our ability to continue to expand our high-quality commercial coverage and our continuing efforts to translate that coverage into covered prescriptions. For Q2 specifically, we expect that sequential net sales growth will be driven primarily by the continued demand growth we are seeing with improving gross-to-nets only modestly contributing quarter-over-quarter.

For the balance of 2023, we expect revenue growth to be driven by both demand growth and further gross-to-net improvement. Turning to the rest of the P&L. Research and development expenses were $35 million in the quarter and included a one-time $3 million NDA filing fee for seborrheic dermatitis. The decrease year-over-year is primarily due to lower clinical development costs for our topical roflumilast programs. SG&A expenses were $43 million for the quarter as we continue to invest in the ZORYVE launch and the upcoming launches in seborrheic dermatitis and atopic dermatitis. Net loss per share was $1.31 for the quarter. Turning to our final slide on Page 19, we provide some key balance sheet and cash flow items. We remain well capitalized with cash of $333 million as of March 31.

We are excited about the progress we’re making in these early innings of the ZORYVE launch and in our ability to drive increased shareholder value. We also recognize the criticality of continuing to invest in the growth of the launch in psoriasis as well as prepare for the follow-on launches in seborrheic dermatitis and atopic dermatitis. In response, we are taking proactive steps to reduce R&D spend, specifically investment in our early stage pipeline, as well as spend in other areas of the Company to ensure we have the resources to invest in the launch. For the remainder of 2023, we would expect R&D quarterly OpEx to be modestly down sequentially, with more significant declines in 2024 as the remainder of our roflumilast clinical program approaches completion.

We are reducing planned expense growth in G&A areas as well, but still expect overall SG&A expense to grow modestly as we continue to fuel the ZORYVE launch and prepare for our next two product launches in 2024. In addition to these prioritization efforts, we have made meaningful progress in our ex-U.S. out-licensing efforts with the potential to further strengthen our balance sheet with non-dilutive capital. This concludes the financial update. I’ll now turn the call back to Frank to wrap up our remarks.

Frank Watanabe: Okay. Well, thanks, everyone, for joining us for the call today. I know for our East Coast colleagues, it’s late in the day. So we appreciate you making the time. And with that, we will open things up to Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question will come from Vikram Purohit of Morgan Stanley.

Operator: And our next question comes from Seamus Fernandez with Guggenheim Securities.

Operator: And our next question will come from Uy Ear of Mizuho.

Operator: Our next question comes from Tyler Van Buren of TD Cowen.

Operator: Next question will be from Chris Shibutani of Goldman Sachs.

Operator: Our next question comes from Louise Chen of Cantor.

Operator: And our next question comes from Greg Fraser, Truist Securities.

Operator: And our next question will come from Sean Kim with Jones Trading.

Operator: Sounds great. And our last question will come from Rohit Bhasin with Needham & Company.

Operator: Thank you, everybody, for your participation in today’s conference. This concludes the program, and you may now disconnect.