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Hello, and thank you for standing by. Welcome to Arcutis Biotherapeutics Q2 2024 Earnings 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 turn the call over to Latha Vairavan, Vice President, Finance and Investor Relations. You may begin.

Thank you, Folanda. Good afternoon, everyone, and thank you for joining us today to review our second 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 would like to 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 thanks to everyone for joining us today. Very excited to be able to provide you with an update on the most recent quarter of our performance. So let me start off on Slide 5 of the deck. We have continued really strong performance since our last earnings call and I continue to be delighted and very proud of the Arcutis team in our execution in the quarter and thrilled about the momentum that we're building towards the second half of the year. 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. Starting off on Slide 17. I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast, dermatology community in the clinic and continuing to hit all of our timelines with regards to regulatory milestones. Echoing what you heard from Todd, I see that HCP excitement around

Thanks, Patrick. I'm on the Slide 21 showing financial results both year-over-year and quarter-over-quarter. As you've heard, our net product revenues for the quarter were $30.9 million, which is up 547% from Q2 of '23 and 43% from Q1 of this year. For the second quarter, our R&D expenses, which include our clinical research, medical affairs activities supporting

Thanks, David. Our goal here is to make a positive and meaningful impact on the lives of people afflicted with chronic dermatologic diseases. And with

Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Vikram Purohit with Morgan Stanley. Your line is open.

Hi. Good afternoon. Thanks for taking our questions. We had two, first on

Yeah. Hi, Vikram. Yeah, Todd, you want to take those two?

Yeah, absolutely. Thank you, Frank. So in reference to PSO and seb derm and the latest, the refill rates we see on psoriasis, our refill rates are roughly around 38% of our total volume. And with seb derm, we see something similar, although we do see some signals that there will likely be a higher refill rate on seb derm eventually than that of psoriasis. So we're very encouraged with the refill rate percentages for both products. And then in reference to utilization of those products, we're assessing that. And at this time, our estimates are that for a patient -- average patient utilization per year for seb derma will likely be around two cans per year. And for psoriasis, it's going to be like around two to three tubes per year for psoriasis. And in reference to the steady-state gross-to-net for foam, we've seen an encouraging ramp relative to improvements in our gross-to-net for foams, especially with the line extensions of the three PBMs. And that we anticipate that we're in a very good position to be able to be in that steady-state high 50s well into the end of this quarter, beginning the fourth quarter of this year.

Understood. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Tyler Van Buren with TD Cowen. Your line is open.

Hey, guys. Congratulations on another solid quarter and all the progress. I have two for you. So the first one is just the prescriptions for the cream have made a nice week-over-week jump over the past two weeks. So I'm curious to understand if this is pull through from the early atopic derm launch already, and if you believe this could be a new trend line moving forward? And then the second question is, considering the latest performance for the foam, do you believe that the foam and the cream will split overall

Sure. Todd, I hate to keep doing this to you, but…

No, I'm happy to do it. These are great questions. So thank you, Frank. In reference to the

Thank you. Please stand by for our next question. Our next question comes from the line of Seamus Fernandez with Guggenheim. Your line is open.

Well, thanks very much and congrats on the quarter and all the progress. A couple questions on the progression in AD and how we should think about it. One question that I have is, just as Kowa comes on to expand the promotion of

Yeah, Seamus, your second question. You're asking about the two year olds to five year olds?

Correct.

Yeah. Sure. Okay. Todd, maybe if you could take the question about Kowa and then Patrick, maybe you could kick us off on the question around AD, just from a clinical standpoint.

You want to start, Patrick?

Yeah. Sure. I'll take that question. Thanks, Seamus, for the question. I appreciate it. So we were thinking about pediatric AD, that two year olds to five year olds represents about 10% of the AD patients that are in dermatologist office. But I think what's really important is to keep in mind that the pediatric AD community is already very much involved in our launch, given that we have six year olds to 11 year olds with the 0.15% approval that we just had in July, as well as adolescents. And both of those are kind of core patients for this pediatric AD treating community. So I think that we're already really heavily engaged with them. And then as we bring the age range down into the two year olds to five year olds, we'll just be able to kind of build upon that. And if you think back to the data that we had for two year olds to five year olds, it's very, very consistent with what we have for ages six and above. So it'll seem like a very natural extension, I think, as we add on that additional age to the indication.

And then, Seamus, if the sound is clear, your first question was in reference to the progression of AD and our expanded promotion and kind of what are some of the key impact points?

That's right, yeah.

Yeah, absolutely. So, first and foremost, we're very pleased with the start of the atopic dermatitis launch. We're receiving very positive feedback from the dermatology community and I think some of the key impact points that we're looking at is, I think first and foremost is for the EHR, electronic health records to have them all brought online to where

Maybe I'll just add, specifically with regard to Kowa, we expect them to start promoting in the field probably towards the end of this quarter. But as I mentioned in my comments, we don't expect to see an inflection in

Great. And then maybe just one question. Is there a point where David and Frank, you are -- and Todd are all carefully looking at the value contribution of a broader, sort of DTC campaign. Where do you think that starts to become most impactful? Is that kind of end of 2025, 2026? There have been good returns on DTC advertising, but just wondering how you're thinking about the spend?

So I think we have a direct-to-consumer program ongoing all the time, and we expanded that with seb derm, and we will expand it further with atopic dermatitis. I think specifically with regard to broadcast TV. That's something that we are constantly evaluating. I don't know if or when we will really ramp up broadcast TV. It's very expensive, right, because you're competing against the likes of Coke and Ford, as well as the big biologic companies for buying that advertising space and the economics for direct-to-consumer TV for $70,000 a year product is very different than the economics for a product that is probably something like $2,000 a year. So I wouldn't say at this point we've made a commitment to going into broadcast TV. It's something that we'll continue to evaluate, but we would only launch that if we felt that there was a really compelling business case that drove shareholder value.

Great. Thank you.

Thank you. Please stand by for our next question. Our next question comes out of Uy Ear with Mizuho. Your line is open.

Hey, guys. Yeah, congrats on a solid quarter. Thanks for taking our questions. So I guess our first question is, maybe just help us to understand a little bit about the gross-to-net changes. I think you indicated from low 60s to high 50s. But if you just take the sales number and divide it by the total scripts, the net -- the implied price seems to be relatively flat. So that's sort of the first question. And the second question is, could you maybe just help us understand, like, the proportions of pediatric patients in the derm offices that you currently detail to versus those in the primary care and pediatric markets that you're expecting Kowa to go after? Yeah, and I guess maybe thirdly, you indicated that the amended term loans has now removed restriction on asset purchases. Just wondering, what do you have in mind in terms of PED? Thanks.

Okay. Great. That's a lot. So let me take the easiest one first. So, in terms of the proportion of PEDs or children, excuse me, in derms versus PCP and PEDs, I think that Patrick mentioned earlier, in dermatology offices, it's only about 10% of the AD patients they're seeing are children, the 90% being adolescents and adults. It's a very different picture in primary care where in the pediatric offices, all of the kids obviously are pediatric, and the majority of the pediatric AD population are sitting with pediatricians, which is why we think this PCP co-promote is so important. There are a lot of adults as well who are seen by PCPs and not by dermatologists. I think that's both a function of the difficulty of seeing a dermatologist. In many cities around the country, it's a six-month wait to see a dermatologist. But also, and Patrick can comment on this too, I think many PCPs feel very comfortable treating eczema as opposed to psoriasis. And then Todd, maybe you can talk a little bit more about the gross-to-net changes. I'm not 100% sure I'm clear about your comment about the implied price, but Todd can talk about the gross nets in a little more detail. And then after he's done, we'll get David to address the debt and business development.

Yeah. In reference to the gross-to-nets, what's been driving, first, what's been driving the improvement in gross-to-net, what's probably been driving that is the increased number of covered prescriptions that we've had in place. And that's -- there's kind of three factors that are driving that, first, is we have had some improvement in relative to our market access. This gives us the opportunity to increase the percent of product that's now being covered by the insurance companies. The other is that we've had, as mentioned earlier, a nice acceleration of gross-to-net improvement with

No, that explains it. Thanks.

Yeah.

Yeah. On the prior questions, I was also wondering whether there's a large proportion of pediatrics or patients in the primary, in psoriasis as well in seb derm that have not -- that have gone untouched.

Yes. So, we've stated before about a third, roughly, of the primary -- of the psoriasis population is treated outside of dermatology. That's a little bit scarier disease, quite frankly, for non-dermatologists. So they tend to refer more, whereas eczema or atopic dermatitis and seborrheic dermatitis, many doctors are comfortable treating those patients in their own practice and so about half of the eczema population and roughly half of the seb derm population are outside of dermatology. And then, I think it's also important to note that, particularly seb derm and to some extent eczema, psoriasis, there are a fair number of patients who are also not being treated. They've even either given up or they don't realize they have a treatable condition. And I think that over time, we may see some growth in the marketplace, particularly in seborrheic dermatitis, going forward, patients who weren't on drug previously coming on to our drug.

And then, David, can you maybe talk a little bit about the debt revisions, specifically business development? Sort of thinking around business development?

I'm sorry, I thought you wanted us to address some of the math around gross-to-net, which I can do for a moment, if you like?

So, I don't know, Uy, have we addressed your questions around gross-to-net?

I think, yeah, I think I was sort of wondering about the mix, so, and I think you guys have sort of explained it, but David, feel free to address the math.

Yes. The only thing I was going to add is the same thing we talked about multiple times at the end of last quarter, right? The way we've chosen to handle commercially insured but uncovered scripts makes it difficult for you to calculate the exact gross-to-net. You don't have all the inputs you need, but it is in the 50s.

Okay. Thanks.

And then, David, question about business development.

Yeah. I'm sorry, could you repeat the business development question?

You removed the restrictions on the asset restrictions -- asset purchase restriction on the amended term loan. Just wondering what you have in mind.

Well, the original agreement had a hard dollar cap on asset acquisitions. That's in this -- in our amendment that has been removed.

Yeah. And then I think really more broadly, I think we think of business development as a potential opportunity, but not a necessity, right? We've got three very strong products now approved. A fourth one, we just filed, we have some earlier stage programs in our pipeline, and we have a pretty high bar in terms of buying things, right? We don't need to go out and buy revenue because of the products that we have and the products we have in our pipeline. But we're always looking. And if something came along that we felt we could create additional shareholder value with, we certainly would think very seriously about that. I think we've built a wonderful development organization both in R&D and in technical operations. And so finding something that we think is a diamond in the rough like ARQ-234 is something we're always looking for, but we're not looking to do at this point in the game, some sort of a roll-up where we're just adding a bunch of revenue that doesn't really create shareholder value.

Okay. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Serge Belanger with Needham. Your line is open.

Hey, good afternoon. Thanks for taking my questions. First one on managed care coverage. I think over the last couple updates you've highlighted, you secured Medicaid coverage from some prominent states. Just curious where you stand on Medicare and I guess where you expect to be once we flip to 2025 and the copromote begins, and also related to that, I think in the past you've mentioned that you expected your Medicare/Medicaid book of business to be as profitable as the commercial book. Have those expectations changed now that you decide to secure that coverage? Thanks.

Yeah. Sure. Great question, Serge. Todd, you want to take those two?

Yeah, absolutely. First, in reference to Medicaid, as mentioned earlier, we've been able to secure coverage in Texas, Florida and New York. We are in negotiations with other states for Medicaid. And those negotiations are moving forward and we're having very positive conversations. And so I expect to pick up additional coverage with Medicaid states as we roll through 2024. In reference to Medicare, we continue to have positive dialogues with the PBMs that manage the Part D plans. And we expect, as you mentioned, we roll over 2025 and into the partnership relative to Medicare, we do expect to be able to have some Medicare access as we initiate and go into 2025. Those conversations with those Part D plans are going well and the coverage would very likely be initiated in 2025, although we are having conversations about the potential to pull some of that forward into 2024.

And then, Todd, can you also comment on what we expect gross-to-nets to look like in Medicare and Medicaid versus commercial?

Yeah, absolutely. So relative to gross-to-nets, we're in a very good position and that's a result of the strategic pricing, the WACC pricing for

Great. And then maybe a follow-up on a prior question regarding the gross-to-net calculations for the quarter and regarding more specifically to a program where you count the commercially insured but non-covered scripts and how they don't impact the copay cards. I don't know if you can disclose how many, the volume of scripts going through that program and whether it's increasing or stable from quarter-to-quarter?

Yeah. I'd be happy to address that question. So relative to the program that we've mentioned as far as the volume going through that versus the, what I'll frame is the traditional program that we have, we do see a high level of the

Yeah. Serge, I might just emphasize again, what we're really focused on is covered prescriptions, right, because shareholders don't make money on a non-covered script. In fact, normally you lose money on a non-covered script. So we have taken to telling you guys what percentage of our scripts are covered. And Todd mentioned, I think, earlier in the conversation, about four in five of the cream scripts currently are being reimbursed by insurance, and about three in four of the foam scripts are being reimbursed by insurance. So those are fully paid scripts, right, and so you guys can do the math. And the gross-to-net that we're reporting is on the scripts that are covered because there is no gross-to-net on a non-covered script because you're not getting paid anything for them.

Yeah. And Frank, on that note, I will mention that if we look at branded topical products and we use, when you were able to accomplish four out of five scripts are covered that's a very high including scripts as far as covered when you look at brand topicals.

Yeah.

Thanks for the color.

Good point. Yep.

Thank you. Please stand by for our next question. Our next question comes from the line of Chris Shibutani with Goldman Sachs. Your line is open.

Great. Thank you very much, Frank and team, congratulations on the progress. Two questions, directionally, if I could, one, financial. As I think about operating expenses and the possibility that you could inflect towards positive EBITDA at some point over the next several quarters or years, what are the factors that now that you have the partnership in place, are guiding, how we should be thinking about your own SG&A levers that seems to be one of the toggles that could help drive towards that profitability here? And then secondly, to talk about the pipeline a little bit, 255, any insight into when we could learn about that? Because we get impatient. And what have you done for me lately? You do have a pipeline, your focus on dermatology, tremendous commercial success, but we're going to be increasingly curious in the months ahead and quarters ahead about what else you could be having in terms of portfolio and particularly in the pipeline? Thank you.

Yeah. Sure, Chris. So, David, you want to take the question around profitability, and then, Patrick, could you maybe address the pipeline?

Sure. Well, I'm not going to comment on timing to profitability or breakeven, but what I will say, obviously, if you break SG&A into S on the one hand, and G&A on the other hand, selling obviously, is always going to be pretty closely correlated with revenue. So the way you get to break even in this kind of business, obviously is through economies of scale on the G&A items, right? And we're certainly experiencing that already. We watch it very closely. We look at it in our own internal projections, and I think it's well on its way to the sort of levels that you'd want it to be at. Okay? Now, obviously, circumstances can change when you launch products like AD, for example, or launch a PCP program, you do incur some startup costs and things like that. But in general, if you strip out those one-time items, the G&A are moving in the direction that you'd like to see them in to achieve what you're referring to.

And Chris, the only amplifying comment I would add to that is, as primary care starts to kick in and drive top-line revenue, we aren't spending our money or shareholders money to drive that business, right? That's really coming from the partner side. And so that's something that will give us more leverage in terms of profitability. It's revenues without expenses really.

Yeah. That's reassuring on the partnership front, so and then on the pipeline 255, I think we're in Phase 1, when do we get a sense of some of the profile?

Patrick, you want to take that one?

Yeah, absolutely. So our kind of historical precedent has been that when we're conducting a clinical trial, when we get to where we've had the last patient enrolled, then we'll kind of make a statement about when we anticipate having the data. Up until that point, we just want to make sure that we're being precise with regard to any prognostication that we provide on timing. So as we move towards having last patient in, we'll make an announcement on the 255. Just today, we did include an update on the ARQ-234, which is the CD200 receptor agonist, kind of noting that we're planning to do an IND filing there in 2025. As we get closer to that, we will kind of continue to refine the date. So now we've kind of put that up on the map as well today.

Thank you. That's helpful.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to Frank for closing remarks.

Okay. Well, appreciate everyone making time in their day to join us today and for the great questions and look forward to speaking to everyone in about 90 days for the next quarter. Thanks again for joining us. Take care. Bye-bye.