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Good day and welcome to Arcutis Biotherapeutics' 2024 First Quarter Financial Results 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 be advised that today's conference is being recorded. I would now like to hand the conference over to Latha Vairavan, Vice President, Finance and Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to review our first quarter 2024 financial results and business update. Slides for today's call are available on the Investors section of the Arcutis website. On the call today are Frank Watanabe, President and CEO; Patrick Burnett, Chief Medical Officer; Todd Edwards, Chief Commercial Officer; and David Topper, 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. We encourage you to review all of the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that let me hand the call over to Frank.

Thanks, Latha, and thank you all for joining us today. You all know the other executives on the call, but I'm really excited today to welcome David Topper, our new Chief Financial Officer. While David is new to his executive position here at Arcutis. He's been an advisor to us for more than four years. I expect many of you are already familiar with David and his exceptional experience and track record in the financial and biopharma worlds and we could not be more pleased that he's decided to join us at this exciting time at Arcutis. As David joins us, I would also like to express my and the entire organization's thanks and gratitude to John Smither for his incredible service to Arcutis over the past five years. He served as our first CFO guiding us through a successful initial public offering and has brought an incredible depth and breadth of both financial acumen and dermatology experience from his 25 plus year career in the pharmaceutical industry. His contribution to the success of Arcutis at a critical time cannot be overstated. And we wish him well in his future endeavors and family time. So with that, let me turn to slide five of the deck. We sustained our strong performance since our last earnings call and I remain delighted with the Arcutis team and our execution during this quarter. And I'm thrilled about the momentum we are building towards a successful 2024. Once again, we saw strong growth during the quarter in our expanding

Thank you, Frank. I'm extremely enthusiastic about the expansion of our commercial portfolio, HCP and patient response to both

Thank you, Todd. I'm now on Slide 16. I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast to the dermatology community in the clinic and hitting all of our time lines with regard to regulatory milestones. HCP excitement around

Thanks, Patrick. I first want to say how thrilled I am to be at Arcutis and working with this team. It's certainly an exciting quarter to be joining the company. I'm on Slide 21. As you've heard by now, we achieved $21.6 million in net product revenues for

Thanks, David. Our intent and vision are to make a positive and meaningful impact on the lives of people afflicted with chronic dermatologic diseases. With

Thank you. [Operator Instructions] And our first question comes from Serge Belanger from Needham. Your line is now open.

Good afternoon and congrats on the progress and a solid quarter. First one, I guess, for Todd, regarding the expansion in Medicaid and Medicare coverage. Maybe if you can just give us an update on where you expect to be by the end of the year or starting 2025. And then secondly, Frank, you previously talked about the relatively low risk of the label approval for AD in July. But maybe just talk about the label you're expecting, if it will include some of the itch data and be broad enough to cover the mild, moderate and severe disease. Thanks.

Sure. Todd, do you want to take that? And then maybe, Patrick, actually, you're probably best positioned to answer the question around the label.

Yes, fantastic, Frank. And first, I'll touch off on Medicaid. So we continue to make good progress with Medicaid. I'll give you an example, it's very recent. Just recently, we picked up coverage at Florida State Medicaid. And not only did we pick up the coverage there, but relative to the step edits have been in place for

Yes. And I can take the question about the label. Obviously, we're in the middle of a review by the FDA for our atopic dermatitis data for ages six and above. But what I can say is that this is an expansion of our existing cream label, obviously, at a different concentration that will be added to that cream label. So our expectation with regard to what will be included is kind of similar to what our clinical trials were conducted in. And I think that if you look at the psoriasis 0.3% cream label, that will give you a pretty good idea of where we expect to land in atopic dermatitis. And notably, you asked about the itch, the itch data were included in that cream data. I think there's an understanding within the last couple of years of the importance of being able to communicate these kind of symptom data like itch. And so they've been included in our earlier label and in some others as well. So I think that's a good direction for the FDA to be taking with topicals. So, yes, we're looking forward to getting the PDUFA coming up here in July and being able to speak with you at that point about what exactly our label will include.

Okay. Thank you.

Thank you. And one moment for our next question. And our next question comes from Seamus Fernandez from Guggenheim Securities. Your line is now open.

Great. Thanks for the questions and congrats on the quarterly results. Wanted to ask a couple of questions here. So first, Todd, great execution with the foam and moving forward from the gross to net and having that really be seamless. When we think about the atopic dermatitis opportunity, can you help us understand how you expect that market to evolve just given the growing comfort that physicians already have with Opzelura and where you see

Sure. Todd, do you want to take the first question on AD?

Yes, I'll take the first question on AD. I firmly believe that we have a significant opportunity in atopic dermatitis. First, relative to access, I do anticipate that like

Thanks, Todd. Yes. So, Seamus, thanks for your question around gross to nets as well. So let me break this down a little bit. In terms of gross to net evolution, we continue to feel very good that we are going to get to a steady state in the 50s. And I think the fact that we were able to get down to the low 60s during Q1 in spite of the annual resets and in spite of the fact that we launched a new drug, I think, really speaks to our ability to get gross to nets down. And I think it also speaks to the value of our overall pricing strategy. We would expect that we'll get to steady state on the psoriasis cream by -- probably by the end of this year. And we're getting very close to already, right? The foam is probably going to be a little bit lagging behind that just because it's a new product and we have to get downstream insurance coverage. But as Todd mentioned already, we're already over 50% covered prescriptions for the foam. And so we think that foam will catch up with the 0.3 cream very quickly. And then we'll have to go through the same sort of evolution when we launch atopic dermatitis. But again, I think, what we've been able to achieve with the foam getting to over 50% coverage very quickly and not having really a meaningful negative impact on gross to net with the foam launch, I think, you would expect to see something very similar with atopic dermatitis. Again payers view these as line extensions that are covered by the existing contracts. And so that really facilitates and speeds up, frankly, our ability to get coverage. In terms of where price is headed, we did price differentially than other branded topicals when we launched. And that really got back primarily to a question of Medicare and Medicaid access. And we're delighted with the recent Florida win that Todd just mentioned. I think that that's another proof point that our pricing and access strategy is working and we expect to have more proof throughout the year as we garner access through Medicaid and fully Medicare as Todd mentioned by the end of the year. In terms of our ability to price hike, frankly, the contracts these days with all the PBMs limits any company's ability to price hike their price protection clauses in there. And we don't think that we are disadvantaged versus the other companies in that respect. The only thing that we do need to be mindful of is the Medicare, Medicaid specialty threshold, which all the other branded topicals are well above, and we are actively trying to keep below. And we have headroom there. So I would anticipate that in the future, there may be some price increases we do have that ability. But I don't think that we're really impaired in our ability to take price increases in line with inflation, any more than any other company as long as we stay under that CMS threshold.

Great. And then maybe just as one follow-up. As you think about the rapid uptake that we saw with regard to seb derm. How should we be thinking about atopic dermatitis? It seems like with product on market, there won't necessarily be that same level of pent-up demand, but perhaps this feels a little bit more like the sort of psoriasis uptake curve. Although, again, when a lot of free drug was given away on the psoriasis curves, those were also accelerated to some degree, although that's not the path that Arcutis took. So just trying to get a better sense of how to think about the trajectory of the uptake curve for cream as atopic derm comes on?

Yes, sure. I think it's a great question, too, Seamus. I think that it would not be realistic to expect to see something an uptake comparable to seb derm for atopic dermatitis. As you mentioned, it's been 20 years since there's been any innovation in seb derm and as Todd mentioned, we thought, think that there was a pretty good sized pool of sort of ready patients just waiting for

Great. Thanks so much.

Thank you. And one moment for our next question. And our next question comes from Vikram Purohit from Morgan Stanley. Your line is now open.

Hi. Good afternoon. Thanks for taking our questions. So we had two, one on seb derm and then one on the potential AD launch. So for seb derm understanding that it's still pretty early in the launch trajectory. What is your current sense on duration and the annual number of cans of product a customer or a patient rather might work through over the course of a year. And then for AD, you previously mentioned entering a partnership to access the primary care setting. So I just wanted to see how those discussions are going. What you currently see as the time line to establishing a partnership and what you would see as the, I guess, the ideal economics in terms of collaboration here. Thank you.

Sure. So around duration and consumption, I think, it's very early still to be able to assess that. We are seeing some refills come through. I don't actually have the latest numbers, Todd may have that. But we are seeing some, but it's not a significant driver of growth, just given how early we are in the launch. Seborrheic dermatitis covers less body surface area than psoriasis or atopic dermatitis. So what may be that patients consume fewer cans throughout the year. I think what we've previously stated was that we thought that, that was probably something like one to two cans a year for seb derm. We don't have anything at this point to revise that guidance. And so I would say that we would expect it to be something similar to that until we learn otherwise and we'll update you guys if we do get information on that. In terms of the atopic dermatitis partnership, what we have been saying all along is that we would like to have that done sometime around the launch. I don't think we need to have it done by the launch necessarily because you really have to win with the dermatologists first. The PCPs will be looking to the derms for an example. And so I don't think it's critical necessarily being primary care right at the launch. But I think it's very likely that we'll have that deal done. We will have a deal done still this year. We're feeling very good about how the discussion has been going with potential partners. And then in terms of economics, it will really come down to the negotiation with the potential partner. They will have obviously a considerable expense just given how large primary care sales forces are. But we've obviously invested a lot into the product. We do have a preference for some sort of a revenue sharing arrangement rather than a fee-for-service because I think that, that aligns the interest of the two partners, which is aligned with the interest of shareholders, right, as opposed to fee-for-service where maybe you get what you pay for. But we'll have to negotiate that with whoever ends up being the final choice of a partner and then we'll let investors know what the economics are around the deal.

Understood. Thank you.

Thank you. And one moment for our next question. And our next question comes from Tyler Van Buren from TD Cowen. Your line is now open.

Hey, guys. Good afternoon. Regarding the primary care partnership, is that something that you would like to happen soon and what would it look like? And how many additional patients do you believe you could reach via the strategy?

Sure. Tyler, First of all, how is the presidential campaign going. So around -- for those of you who weren't at their conference that was an inside joke. On the PCP partnership, as I just said to Vikram, I think we'd like to have this done sometime around the launch, which is probably going to be in the August time frame. I feel very confident about our ability to get it done before the end of the year. So that's kind of -- I would put that as bookends. And in terms of the opportunity size, about 50% of atopic dermatitis and about 50% of seborrheic dermatitis patients are treated outside of dermatology. They're not all in primary care or pediatrics, but a very large percentage of those patients are sitting in a PCP or a pediatrician office, both seb derm and AD, more pediatricians for AD, more PCP for seb derm just because the ages of onset of the disease? So we're looking for a partner that has good coverage primarily of the PCP and the pediatric specialties. If they had coverage in allergy, that would probably be also a benefit, although that's a very small community, but it's a pretty sizable additional opportunity by tapping into primary care and pediatrics just because that's where the patients are sitting.

Thank you. And one moment for our next question. And our next question comes from Uy Ear from Mizuho. Your line is now open.

Hey, guys. Congrats on the quarter. Yes, my first question is, I think you said you're expecting gross to net to reach steady state towards the end of the year. But you're going to, I guess, have Medicaid and or more Medicare, I guess, coming online towards the end of the year as well. Just are you kind of saying that the Medicare and Medicaid will not have an impact on gross to net in 2025 or like how should we sort of think about the interplay with Medicare and Medicaid in terms of gross to net? And secondly, could you perhaps elaborate on your new program, your distribution programs, where I think you said that you for every unit, the specialty pharmas get one unit for uncovered patients. I didn't quite understand it. Thanks.

Sure. Yes. Good to hear from you. I'll answer your first one and then Todd I'll ask you to talk about the pharmacies. Yes, so I did say that we thought -- I think we will get to our steady state or around our steady state for this year on the psoriasis book of business. And, yes, that does factor in Medicare and Medicaid coverage. A couple of things to keep in mind. One is Medicare and Medicaid is a less important contributor to the psoriasis business than it is seb derm and AD just because of the demographics of the patient population, it's quite a bit smaller. But secondly, as we've said previously, with our pricing and access strategy, we don't anticipate having to give outsized rebates for Medicare and Medicaid coverage. And I think when you look at it all in, the Medicare and Medicaid book of business is probably going to be similarly profitable to the commercial book of business. So we don't see -- we don't expect that to have a really meaningful negative impact on our gross to nets. Todd, do you want to maybe talk about the pharmacy.

Yes. Fantastic. I will. And just to mention, relative to improving our gross to net, we took a, what I'll call a multipronged approach. And the program that I'll talk about here in just a minute was only one lever that we pulled to improve our gross to net. But specifically to that program, if you think about it, prior to implementing the current program, when a commercially insured noncovered are

Okay. Thanks.

Thank you. And I am showing no further questions. I would now like to turn the call back to Frank for closing remarks.

Okay. Well, I'll be very brief as well. Really appreciate everyone calling in for the call today and the great questions we've had and we look forward to talking to you all in about another quarter. Thanks a lot. Bye-bye.