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Good day, and welcome to the Arcutis Biotherapeutics Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Eric McIntyre, Head of Investor Relations. Please go ahead.

Thank you, Abigail. Good morning, everyone, and thank you for joining this morning to discuss our Q3 2023 financial results. The slides for today are available on the Investors section of our website. On the call this morning, we have Frank Watanabe, President and CEO; Todd Edwards, our Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and John Smither, Chief Financial Officer. I'd remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. With that, let me hand the call over to Frank. Frank?

Thanks, Eric. So, I'm on Slide 5 of the deck now. So, we're really pleased with the Arcutis team and our execution in the quarter. We made remarkable progress since the last time we spoke regarding our Q2 earnings. Starting off with the

Thanks, Frank. I'm very enthusiastic about joining Arcutis team, and looking forward to the tremendous opportunity ahead. It is great to be speaking with all of you today to provide a brief commercial update. Moving to Slide 8. The

Thank you, Todd. I'm now on Slide 12. As Frank highlighted, it's been a very busy quarter, and I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast to the dermatology community and hitting all of our timelines with regard to regulatory milestones. So, starting with psoriasis first. Here, we announced the approval down to the age of six. This expands our current indication and the overall opportunity in pediatrics, and we look forward to adding to the five-year-olds in psoriasis, which will be the subject of a future FDA review pending some additional data. Moving on to Seb Derm, which will be the first indication for the foam where we have an upcoming PDUFA on December 16, with an early 2024 launch being planned. Physician excitement for Seb Derm is palpable, driven both by our unprecedented efficacy with this once-a-day foam, and an area where there has been no innovation in decades and no branded competition, all this in a market as big as psoriasis. So, moving on to Slide 13, where I want to highlight a few points on the efficacy in Seb Derm. On the left, I'm showing the 80% of patients got the IGA success. This means that they reached clear or almost clear on the IGA scale in eight weeks, and they started from a baseline of moderate or severe. But what's really generated a lot of excitement is on the right, where we show that we've got 50% of patients to completely clear. This means they had no erythema, no scaling, no evidence of disease. Not shown on this slide, but also we saw improvement in itch in as little as 48 hours after initiating treatment. Itch is the primary symptom of Seb Derm, and really drives an impact on quality of life. So, moving on to Slide 14 now. Here, patient surveys highlight the significant negative impact that Seb Derm has on everyday life. Anxiety and a very negative impact on both social and work life with over three in four patients expressing anxiety about their disease. Over 90% say it negatively impacts their social lives. In addition, HCPs have expressed to me that they feel like they're failing their patients in many instances, because patients keep returning and docs don't have anything to offer beyond the same topical steroids and antifungals that they've been treating them with previously. We also recently reported quality of life data at the AMCP Conference, which showed the meaningful benefit roflumilast foam had in improving patient quality of life as measured by the Dermatology Life Quality Index, or DLQI. Moving on to Slide 15. I see Seb Derm is having some dynamics that are favorable for rapid adoption. We have significant pent-up demand for this novel non-steroidal foam offering, primarily due to lack of brand competition and lack of innovation, but also higher patient dissatisfaction than what we see in psoriasis and a greater need for better treatment options, as many patients are on impractical treatment regimens composed of topical corticosteroids and antifungals that have significant limitations of use. We also have an opportunity to leverage the positive experience in psoriasis with those already prescribing and to leverage foam to further expand the

Thank you, Patrick. Good morning, everybody. I'm beginning on Slide 18. For the third quarter, we reported net product revenue of $8.1 million, reflecting a 70% growth quarter-over-quarter on top of the about 70% growth in Q2. This was largely driven by substantial gross to net percentage improvements down to the lower 70s, particularly with the CVS coverage win and the team's execution to ensure prescriptions are covered by insurers. We also saw healthy demand growth in the quarter. Looking forward to Q4, we expect further

Thanks, John. As John mentioned, we continue to evaluate all of our activities as we transition from a development stage to a commercial stage company in order to effectively manage our expenses. Back in Q1, we announced a de-prioritization of a number of our R&D programs. And then based on those changes and as our ongoing large Phase III trials are winding down, earlier this quarter, we completed a limited restructuring to better align our organization with our ongoing activities. Today, with the expected approval of roflumilast foam and the successful submission of the AD sNDA, we're announcing some further changes in our leadership to further align our organization with our priorities. Patricia Turney will be stepping down as our Senior Vice President of Operations, and David Osborne will be retiring as our Chief Technical Officer. Both Patricia and David will continue on as consultants to the company to facilitate this organizational transition and to lend their extensive expertise in the future. We will be merging our technical operations and product development organizations and Bethany Dudek has been promoted to the role of Chief Technical Officer, overseeing the range of these activities. We're excited to have Bethany taking over our technical operations. She's been with Arcutis for the past three years as the Head of Quality and has done an outstanding job. I would add, I've worked with Bethany off and on for the past 15 years. She's an outstanding executive and I feel very confident about her. She brings to her new position, extensive experience across product development and quality and manufacturing built over a 28-year career at Arcutis, Kite, Novartis and Amgen. So, with the ongoing

Thank you. At this time, we'll conduct the question-and-answer session. [Operator Instructions] Our first question comes from Tyler Van Buren with TD Cowen. Your line is open.

Congratulations on all the progress during the quarter. I have a couple for you related to Seb Derm. So, for the potential topical roflumilast approval for Seb Derm, can you elaborate on where you are with the regulatory review and if you've started labeling discussions? And then the second question, just regarding the launch trajectory and the coverage relative to

Yes, Tyler, great to hear from you. With regard to Seb Derm, as a policy, we don't comment on ongoing reviews with the FDA. So I don't feel it would be appropriate for me to make any comments on the process. I will say that I think we feel very confident about the upcoming PDUFA date. And we think that the data speaks for itself. With regard to the coverage, I think I'd ask Todd to respond to that one, if you could both to clarify around the first two and then our timing on the third.

Yes, absolutely, Frank. Thank you. And good question relative to the contracts and Seb Derm. So two of the -- as mentioned, with two of the large PBMs within our contracts today, the Seb Derm launch will be treated as a line extension. So what that translates to is that we're starting this launch at a position of strength, meaning that at launch, those two PBMs will cover Seb Derm as a covered product, which will help us also with a good strong -- good start to our gross to net. The third PBM, we are currently in negotiations with, and those negotiations are very positive right now. So we look to further those conversations with the ambition of having coverage at launch with that third PBM.

Thanks. Abigail, we can go to the next question.

[Operator Instructions] Our next question comes from Seamus Fernandez with Guggenheim Securities. Your line is open.

So maybe just as a first discussion point. Would you guys mind sort of comparing and contrasting the launch of

Seamus, it's always good to hear from you. So just so we're clear, you were asking Todd about

Yes, I just didn't name the product.

Yes, that's okay. I can say that. Go ahead, Todd.

Yes. Great. Thank you. So first thing relative to Seb Derm launch. So currently, we're working on some disease state awareness activity for both patients and dermatologists that's a targeted education, which will likely be focused, obviously, prelaunch. With the emphasis on the frustration of the condition, the impact on quality of life as well as the polypharmacy that occurs here. We're talking about five to six treatments per patient. And often, it takes 15 to 30 minutes a day spent with this regimen. So it's a very frustrating situation for patients. There's been no innovation branded products within this space for over two decades. And if you think about the number of available patients that you talked about a warehouse of patients, so there is a ready pool of patients that are yearning for a product like

John?

Seamus, this is John. To answer your question on the covenants, the 75% applies to the year-end number for 2023 or the year plan number, and then it's a monthly calculation in 2024 with a six-month lagging average. So, whatever that number is, you apply 75%. If we're above it, we're good. And that's measured each month in 2024.

Great. Thank you. And maybe just a quick final follow-up. In terms of the stocking necessary to really have this be executed as a robust launch, when should we anticipate the sort of official launch of the foam, regardless of the sort of PDUFA approval timelines? Is this a day of kind of PDUFA hitting the ground running? Or should we think about this as more of a potential sort of stocking the pharmacies event in the last few weeks of the year, followed by maybe a mid-January to kind of February launch timeframe? Just trying to get a little bit of incremental granularity before we get too excited to track the Seb Derm scripts.

Yes. Absolutely. So as mentioned, we have the PDUFA December 16, with the full commercial launch anticipated to be mid to late January. So we want to make certain we have ample time to be able to stop the channel, make certain pharmacies have product on shelf as we launch this and drive demand.

Yes. And maybe just to put a fine point on that. Seamus, as you know, with topicals, is a little challenging because of labeling. It's more challenging than pills or biologics. So I don't think you should anticipate to see any stocking in Q4.

Our next question comes from Vikram Purohit with Morgan Stanley. Your line is open.

We had two. First, on

Yes. So I think those probably are both for Todd.

Yes, absolutely. So let me first cover off on relative to the gross to net and what drove the change in gross to net, what we need to continue to do to amplify improvement. So improvement in [coverage] (ph), as we saw in Q2, obviously accelerated in Q3. So we saw an improvement in the percentage of covered prescriptions across all the major PBMs in Q3, with CVS driving the most dramatic improvement. Also seen improvement across the other two large PBMs. If you think about it, if this translates into reduced co-pay expenses and provides us a springboard to continue to improve gross to net and leverage this progress further. We expect our field force execution and to be a continued focus on pulling through our coverage to produce approved gross to net in Q4 and beyond. And as we roll forward, we're going to be building and working -- developing partnerships with dermatology pharmacies, which reinforces our conviction that we can achieve our target gross to net. So through coverage, through our partnerships with these independent derm pharmacies will translate into further improvements as we go forward with our gross to net. And then the other question was?

Seb Derm uptake relative to psoriasis.

Yes. Seb Derm uptake relative to psoriasis. As mentioned, there's a ready pool of patients that are gearing for new treatment options with Seb Derm. There's no branded competition within the market, no innovation in the market for over two decades. And so I would anticipate a robust uptake at launch with Seb Derm, whereas compared to the psoriasis market, it's a highly competitive market, multiple competing products within there, which Seb Derm is very much unlike that.

And Vikram, I'd just remind you. To Todd's point, we picked up that CVS coverage 7:1, so right at the beginning of Q3. So that was certainly major contributor but not the only contributor to the improvements in gross to net.

[Operator Instructions] Our next question comes from Uy Ear with Mizuho. Your line is open.

Congrats on the good quarter and all the progress. I guess the question is for Todd. You've been there for a little while now. And just wondering, what are some of the changes that are different that you're looking into executing? I know that you've already added some sales force, increased the sales force size. But what are some other changes that you might put in play to improve script uptakes for psoriasis and maybe as well as for the Seb Derm upcoming launch?

Yes, absolutely. Just a few things. After many years in dermatology, I see a tremendous opportunity to change the treatment of paradigm in these three largest disease areas that we've been talking about here today to include, psoriasis, eventually Seb Derm and atopic dermatitis. If you think about it, the dermatology communities, they've been yearning for nonsteroidal options that still fit with their -- I call it a topical first mentality, derms are oriented towards the local treatment. You think about

Maybe I'll just add, because Todd is modest. We ran a very extensive search for our new Chief Commercial Officer. And it was very clear to me that Todd was the right person to join this team. I believe that leadership matters, and we chose Todd because look, he has a proven track record. He's done this before. He successfully launched other topical products in the space very recently, has very effectively driven demand and has also very effectively managed gross to nets. And I have complete confidence in him and his ability to lead our commercial team. We also did announce the promotion of Ayisha Jeter to head both marketing and market access. She had been previously -- while she was the interim Chief Commercial Officer and had been running market access. And I think along with Todd, I have real confidence in their ability to launch these additional indications and continue to drive the growth of

Can I follow up with just a question on gross to net? So I guess if your target is to reach steady state somewhere sometime in the second half of next year, it sort of implies that the quarterly pace improvement is pretty significant. I was just wondering if you can sort of just talk a bit, perhaps help us quantify what the improvement could be in the fourth quarter, at least?

I'm thinking about it. We tend not to give forward guidance on gross to net. I would say, we saw a very significant improvement in Q3 over Q2. We saw a nice improvement in Q2 over Q1. I think we will see a further improvement in Q4 versus Q3. I won't commit that it will be of a similar magnitude as what we saw in Q3 because that was a pretty big move. But I think Q4, you may see a little bit of noise in Q1 with the co-pay resets, but we'll continue to make progress there in Q2 next year as well. I think it's not a miracle occurs here sort of phenomenon for us to get to our target gross to net, with continued execution against the programs we already have in place and the coverage we have in place.

[Operator Instructions] Our next question comes from Chris Shibutani with Goldman Sachs. Your line is open.

On the commercialization effort, the increase in the sales footprint that you have, can you give us a sense for how maybe more specifically, the composition of this group might be able to be impactful? And what's the appropriate way to think about the timing for a potential inflection from that? And then, Frank, I think, historically, you've acknowledged how AD as a market is certainly quite vast into market to a primary care type potential market. It would contemplate a partnership for that market specifically. Can you talk about what your latest thinking is there?

Yes, sure. Maybe I'll take the second question first, and then I'll ask Todd to talk about the sales force. Yes, Shibu you are absolutely correct. You recall correctly our previous comments, about half of the atopic dermatitis market and also about half of the seborrheic dermatitis market exist out of dermatology. A lesser portion of the psoriasis market, there's not insignificant number of psoriasis patients also treated outside of dermatology. The challenge for the primary care and pediatrics markets, which is where most of those patients sit, is just the breadth of the prescriber base, you're talking 250,000 prescribers versus 13,000 prescribers, it's not economically viable for a company like ours to build a primary care sales force. And so, we have been saying all along, our intention was to find a partner that had an existing primary care sales force that could do a co-promote for us in those markets. That continues to be our plan. And I would just say at this point that we're in active discussions with potential partners to try and strike an agreement. We also have said in the past that from a timing standpoint, ideally, we want to have that partnership in place sometime around the atopic dermatitis approval. And I say around because the PCPs are going to be looking to the dermatologist for guidance. And so we have to win with the dermatologist first. I don't think we need to have that PCP partnership in place at launch, but you would want to have it sometime shortly after that launch or there wouldn't be any downside to having it before either, right? So, I think you should really be thinking about us hoping to have that in place in the second half of 2022 -- 2024, excuse me. And then, Todd, do you want to talk a little bit about the sales force expansion?

Yes, relative to the sales force expansion, the 15% increase in share of voice, so that 15%, we took that 15% and we overlaid the current sales force. What we did is look at the high-prescribing geographies to make certain that we can continue to obtain the desired frequency and reach and engagement with those high-prescribing physicians. So, we overlaid that 15% into those geographies. In addition to that, as we move through 2024 and we -- in the atopic dermatitis launch will at that time, give consideration to potentially another expansion to make certain that we have the share of voice required to be able to engage across the three indications. And don't forget, 2023, Arcutis aligned a group called the Pharmacy Access Managers within the field. This team engages directly with the independent pharmacies as well as the staff with the dermatology offices to ensure that we're getting appropriate prescription fulfillment. So, I feel that the organization is at a very good place right now to have the appropriate share of voice that we need to be able to continue the acceleration of

And that expansion, we completed October 1. So I mean, I think we'll see some impact even in the fourth quarter, and that will continue on into '24.

Yes, absolutely.

Great. Look forward to momentum from that new sales force.

[Operator Instructions] Our next question comes from Sean Kim with JonesTrading. Your line is open.

Congratulations on the quarter. I guess just a few quick questions on my end. The first question is as you look to moving to government, Medicare, Medicaid patient populations, can you comment on the potential additional operational efforts and maybe financial burden that will be required to tap into that market and maybe potential sales opportunities there? And my second question is about the sales force expansion as you look to launch Seb Derm and also atopic dermatitis. I believe you mentioned about 9,000 unique prescribers that have prescribed

Great. Maybe let me take your second question, and then I'll have Todd address your first question, and John address your third question. So yes, look, I think with regard to our breadth and depth, we've talked about this before. There are about 13,000 targets that we are targeting with our sales force. They represent over 90% of the relevant prescriptions in dermatology. Out of that 13,000, about 9,000 are currently writing. So there clearly is an opportunity to expand the breadth of our prescribing base. I don't think we will ever get all 13,000 of them, because you have some doctors who just are ultra conservative and are never going to change from using their old topical steroids. But I think we'll eventually get very high penetration. And we've been adding roughly about 500 doctors a month for quite some time now to that prescribing base. I think we were sitting at 7,000 in the last quarter, right, something like that. So we will continue to expand the prescribing base. I'm confident of that. And I think as Todd mentioned, I think the foam could actually help us with that broadening of the prescriber base. And then I think you also are correct that there's an opportunity for a lot of deepening of the prescribing base. If you look at the topical steroid market today compared to the topical non-steroidal market, the topical steroid market is about 20x the size of the non-steroidal market, right? So even doctors who are writing 10

Yes, Medicare and Medicaid, as I mentioned in the opening remarks, there's approximately 3 million patients that are in play here. And if you think about Seb Derm, it's more so on the Medicare side and atopic dermatitis on the Medicaid side. We've been actively engaging in the Medicaid space to be able to secure coverage for patients in 2024 preparation for the atopic dermatitis launch. In addition to that, we're having conversations with the big three PBMs relative to the Part D plans in Medicare, with the ambition to secure that coverage in the first half of 2024. I think what's very important to note here, especially with the Medicare is that is the Arcutis' repricing strategy, given where our price point is and it's below the CMS specialty tier, we will very likely be able to gain this coverage in Medicare with a nominal impact on our gross to net. So we're actively engaged, and those conversations are progressing.

Let me that the...

Yes. And then if you want to...

On the SLR covenant, the way it works is if you were to look at it today, there is a table with specific revenue targets that prior to the amendment, we were held to with respect to the loan agreement. That's been replaced with an agreement around a plan, which we do every year as due course. And there's agreement and approval of that plan by our Board and SLR. And whatever that plan is, you apply this 75%, and if we're above the 75%, we've met the covenant -- is how it mechanically works.

Thank you. That concludes the question-and-answer session. At this time, I would like to turn the call back to Frank Watanabe for closing remarks.

Okay. Well, I appreciate everyone making the time to call into our earnings call this quarter, and we look forward to talking to you all in another quarter with an update on further progress at Arcutis. Thanks again.