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Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics 2025 Second Quarter Financial Results 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 first speaker, Brian Schoelkopf, Head of Investor Relations. Please go ahead.

Thank you, Michelle. Good afternoon, everyone, and thank you for joining us today to review our second quarter 2025 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 Latha Vairavan, 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, Brian, and thank you to everyone for joining us today. I'm pleased to report that in the second quarter, we continued to see strong sales and demand growth with our

Thank you, Frank. I'm on Slide 9. In the second quarter, we achieved $81.5 million in net product revenue for

Thanks, Todd. I'm on Slide 16. In the quarter, as you come to expect from us, we made significant progress against our clinical and regulatory objectives as we received FDA approval for

Thank you, Patrick. I want to start by reiterating the strength of this quarter. Our improved operating leverage allowed the strong top line growth to translate to a reduction in cash burn and reemphasizes that our disciplined approach to capital allocation has us on a path to cash flow breakeven in 2026. I'm on Slide 21, showing financial results both year-over-year and quarter-over-quarter for the second quarter of 2025. As Todd has stated earlier, we generated net product revenues in the quarter of approximately $81.5 million, which is up 164% from Q2 of 2024 and 28% from Q1 of this year. Cost of sales in the second quarter were $7.5 million compared to $3.5 million in 2024, primarily driven by increased

Thanks, Latha. As you've heard throughout today's call, we built a strong and sustainable foundation for our business and our prospects for continued near, medium and long-term growth at Arcutis are strong. As we continue to execute our multifaceted plans to sustain this growth, we look forward to sharing updates on our progress. And to that end, we will be holding an R&D Day in the fourth quarter of this year to go into greater detail on several key aspects of our clinical development plans and corporate strategy. And with that, we'll open up the call to Q&A.

Our first question is going to come from the line of Seamus Fernandez with Guggenheim Securities.

Congrats on the great quarter and reaching at least for this quarter, cash flow positivity. A couple of questions here. maybe just to start off, as we think about the sort of progression of revenue from second quarter to third quarter, it sounds like we should think about this as a little bit of a perhaps even a slightly down quarter? Or should we think about it more as a sort of flat progression or moderating growth as we think about third quarter? And then, Frank, I think it's very obvious the opportunity to continue to really pursue the switch from topical steroids more broadly, especially considering the range of areas where topical steroids are utilized. But I wanted to just get a better sense of how far reaching you feel the opportunity is to move beyond the 4 initial indications here. Obviously, there's a number of indications that were listed on the slide on the R&D side. But you also mentioned potential business development pursuits moving forward beyond the existing pipeline. What do you feel would be kind of a good right fit for the company as you look beyond this? Is it to be able to scale the business with on-market assets? Or is it more to really release your R&D organization given the sort of clinical excellence that's been demonstrated so far?

Yes. So Seamus, maybe I'll answer your second question first, and then I'll ask Todd to address the question around revenue. I think that -- from a clinical standpoint, it's pretty clear that

Yes. Great. Thank you, Frank. And Seamus, we still anticipate sequential growth in the third quarter as we expect continued growth across all indications. The rate of growth in the third quarter will be slightly moderated due to the seasonality that we spoke about. But nonetheless, we remain very optimistic about the growth. I'll just frame it that we continue to want to see sustained momentum within this franchise and will in Q3 and beyond.

Our next question is going to come from the line of Tyler Van Buren with TD Cowen. This is Yena on for Tyler.

I had a question about the Kowa partnership. And you guys also mentioned that you set up a national dedicated pharmacy. I was wondering what the early utilization of that looked like. And again, could you elaborate on the contribution of the Kowa partnership to date?

Yes. This is Todd. Yes, thank you for the question. And as discussed before, we anticipated a slower adoption of

Our next question will come from the line of Uy with Mizuho.

Congrats on the quarter. So maybe just first question is, could you maybe just help us understand the gross to net dynamics in the quarter was better than what we expected, particularly for each of the individual products, if possible or just the foam?

Do you have additional questions? Do you want to finish them off?

No, no, that's fine. I'll follow up.

Okay. So in regards to gross to net, as Todd commented, we -- gross to net has been stable for the quarter and in the 50s. And beyond that, we haven't quite ever commented on the products. So I'm going to leave it at the 50s.

Gross to net is not changing very much anymore, and I wouldn't expect that it would.

Okay. And I guess in the press release, you guys commented on 3 patents that was allowed, I guess, in the quarter. Could you sort of elaborate on that?

We had -- yes, we had 3 additional patents that were issued in the quarter from the U.S. Patent Office. None of those extended the LOE for the product. But I think they are further expand the strength of our IP portfolio. We now have 24 issued U.S. patents and many of those listed in the Orange Book. And I just think that it speaks to the further -- the continued strength of our intellectual property portfolio around

Okay. And sorry, last question. You mentioned 2 studies, 2 Phase II studies that are ongoing. And I guess one of them is the atopic study in pediatric 3 months to 2 years old. What's the other one?

So we talked about initiation of a 3- to 24-month study in atopic dermatitis with

And just to clarify, those Phase II studies are in HS and vitiligo, I believe both of them are posted on clintrials.gov now.

Our next question is going to come from the line of Andrew Tsai with Jefferies.

Congrats on the execution. Maybe a bigger question. Can you give us your latest and greatest thinking on how you're thinking about the peak sales opportunity across your 3 current indications and how that's changed compared to your original thinking?

So Andrew, we have not given peak sales guidance for quite some time. I think it was 2022 last time. At that point, we had said that we thought that each one of the indications, i.e., psoriasis, AD and seb derm could be in the range of $700 million to $1.2 billion per indication. I think we have not dramatically changed that view of the opportunity. If you just sit down and do some quick back of the envelope calculations, we're sitting at something like 2.5% market share in the total topical market. If that grows to 10%, you're well north of $1 billion. And I think that 10% of the topical market is very achievable and probably is a low bar given the clinical profile that we see and particularly if we expand beyond the 3 initial indications, as Patrick just mentioned. What I will say is that we continue to evaluate this. And I think you can expect some further guidance from us in the future about what we think the peak sales potential is. But clearly, we are really just scratching the surface in the total commercial opportunity for

Agreed. And then a follow-up to the last question on vitiligo and HS. Is it possible that we get initial data from the IST studies in 2026? Or is it sometime later? Just wanted to gauge your news flow.

Yes. I mean, right now, we're not putting out any expected time line for those trials. As we get engaged into our collaborative research that we're pursuing for these Phase II trials, we'll have a more clear understanding of what that might be. So we would expect to provide some guidance as we get further into them. But at the current time, we're not able to give a milestone or expected time line.

Our next question will come from the line of Judah Frommer with Morgan Stanley.

On the quarter. Just a couple for us. I guess, first, we're hoping you can maybe elaborate a little bit on the pediatric opportunity in atopic derm, kind of what penetration ramp could look like there relative to in adults given kind of potentially arguably greater unmet need or safety concerns there for those patients? And then separately, I think this week, we saw a second joint status update on the Padagis litigation. Just curious if there was anything you could add there? Is the case just stayed and we're waiting for an update? Or was there more to that?

Yes. Patrick, do you want to maybe take the first of those questions?

Yes. We're really excited about the opportunity in 2- to 5-year-olds that's upcoming with the 0.05% when that's the approval that has a PDUFA in October. Out of the 9.6 million patients -- pediatric patients with AD, about 1.8 million of them are in this 2- to 5-year-old age range that are being topically treated. And so we were just at the Society for Pediatric Dermatology meeting in Seattle and really got a very good understanding of just how important this age group is to them. I think because many of these are kind of difficult to manage patients. As I mentioned, this is a disease that comes on early in life, and there's a lot of avoidance of topical steroids from parents. So what we're looking to be able to do is to present an option into these deeper age ranges. And 2- to 5-year-olds is the first step for us. And as we mentioned, we're getting started with the 3- to 24-month old trial as well with the same concentration. And I think it's just a very good fit between the need and the expectation of parents to be able to manage their kids without topical steroids and the profile that we've been able to show so far. So we're really excited about the upcoming approval.

Yes. And Patrick and I were both just at the Society of Pediatric Derm 2 weeks ago. Do you want to maybe just give some color about the tenor of the conversations at SPD?

Yes. I mean there are conversations were about a very large patient flow in their offices for this age range because of the challenges of topical corticosteroid use. And it's common for a patient to be seen in a pediatrician's office, they might get one topical corticosteroid as their kind of start off. And then if that's not able to completely manage the disease, then they're looking to be referred oftentimes either to a pediatric dermatologist if one is available. But dermatologists, it's very common for them, even if they are seen as adult dermatologists to be seeing patients down into the age of 2 and sometimes even younger than that. So not all of these patients are managed by pediatric derms. But pediatric derms definitely represent kind of the core for education within this age group, and they influence a lot pediatrician prescribing and pediatrician openness to being able to use a new therapy. So we think our contact points within both the pediatric dermatology community are really important. And that's what we were seeing when we were at the Society for Pediatric Dermatology, but also the adult dermatology health care providers are a really important point for managing these patients also.

And then just with regard to the Padagis case, recall that there is a requirement in the litigation stay that the 2 parties jointly provide periodic updates to the court. The first one of those updates has just recently been provided. those updates are confidential. In fact, even I don't see them, but it was provided for in the stay. And I think the one relevant data point that all of us should be aware of was is that everyone agreed that the stay should and will remain in place.

Our next question comes from the line of Serge Belanger with Needham.

Congrats on a great quarter. First question, regarding the 2Q performance, I think you mentioned that sales were up 28% quarter-over- quarter. I believe scripts were up 13%. So maybe just reconcile the difference. Was it just a bump up in gross to nets from Q1? And I guess the follow-up to that is, I think you mentioned you expect gross to nets to be stable for the rest of the year. So should we expect script growth to be the main driver for sales over the remainder of 2025? Second question, I think Todd talked a little bit about the issues regarding Medicare Part D. Can you remind us what part of the TAM Medicare Part D represents for

Todd, do you want to maybe address the bridge on sales?

Yes, address the bridge on sales. The main driver of the product revenue growth over demand growth was a recovery in distribution inventory levels back to normal following a drawdown in the first quarter. What I want to be clear about is that we did not see abnormal inventory stocking levels in the second quarter. This was simply recovery back to normal levels as a result of the drawdown in the first quarter. In reference to gross to net, as mentioned and as Latha reinforced, we expect gross to net to be stable for the remainder of the year. So yes, that will -- the primary growth driver will be volume and demand. We're very encouraged in what we see across the portfolio. We recently launched

Yes. And then just with regard to Serge, your question around Part D, across the 3 diseases, keep in mind, let's say, roughly about half of those patients across our 3 indications are government pay, either Medicare or Medicaid. And the relative split between Medicare and Medicaid really varies by disease. Atopic dermatitis is much more heavily Medicaid because of the age of the patients. Seb derm is much more heavily Medicare because of the age of the patients. And psoriasis is somewhere in between, although less psoriasis patients are government than with Seb derm or AD. So I think in totality, again, it's about half are government. We're rapidly penetrating into Medicaid, slightly less than half of that half is Medicare. Does that address your question around the Medicare piece?

Yes. I guess the other part of that question was, when do you think you'll be in a position to start capturing that coverage?

Yes. That is hard to say because, unfortunately, it's completely outside of our control, right? As Todd mentioned, the dynamic that we're seeing is -- and you all probably have seen this if you cover the insurance companies, with the changes in the IRA that were adopted January 1 of this year, the insurance companies are losing a substantial amount of money on their Part D book of business and a number of them have had to issue earnings warnings even as a result of that. And that disruption then is leading them to be, I think, very conservative and to be looking at their businesses. To the best of our knowledge, I don't think any new drugs have been added this year to the Medicare Part D formularies across all indications. So that tells you just sort of how perturbed they are. we don't know when things are going to settle out and they're going to start moving forward again. We continue to have, I think, constructive dialogues with the Medicare Part D plans. But when your boat is sinking, the last thing you're thinking about is picking up new passengers. And I think that's a little bit how they feel right now. I expect it will stabilize. We think Medicare is still an important opportunity for us and will contribute to our growth in the future. I just -- it's very difficult at this point for us to call the ball on what the timing would be for that.

Okay. Maybe one last one. Obviously, your sales force has executed well, growing sales here in the second quarter. And it sounds like Kowa had -- still has little contribution so far. So with the additional approvals coming up later this year, is there a case to be made to continue expanding your own sales force to continue executing well and growing the piece within the derm offices?

So I don't think we see or see at this point any need to expand in dermatology. We have a very well-sized dermatology sales force, and we have good coverage, good frequency on our dermatology targets. What we will have to continue to evaluate is opportunities outside of dermatology and think about how we address those opportunities. We felt that the Know partnership was a smart way, an economical way for us to access the primary care and pediatric opportunities. But at this point in the game, we don't have any plans for any further sales force expansions on the Arcutis sales force.

Our next question is going to come from the line of Douglas Tsao with H.C. Wainwright.

Congrats on the progress. I'm just curious, when we look at -- I think it's Slide 11, and you obviously -- as writers or as doctors write more for more indications, you sort of get a real economy of scale or sort of logarithmic effect in terms of the scripts that they're writing. How long does it typically take for docs to write for multiple scripts? Are they sort of coming at it sort of incrementally? And are there things that you can do or have started to do to sort of increase the indications that an individual doc is writing for?

Yes. Thank you for the question. Arcutis is in a very good position with

And I'm just curious, if I can, a follow-up just to the extent that some doctors might only still be writing for one indication, is it your sense that perhaps they don't have awareness of the breadth of the label? Or is it perhaps unique to their practice where they just might see sort of have a concentration into one of the indications?

Yes. Within our dermatology target universe, the dermatologists that have only adopted one indication is truly the exception. And usually, that's something that's unique to their practice or to their patient population. We continue to engage with dermatologists, educate them on the

Our next question comes from the line of Richard Law with Goldman Sachs.

Congrats on the progress. A couple of questions from us. So following up on the Medicare discussion, what drug classification would

Relative to with regard to Medicare relative to the class, the market basket, if you will, we would be within the dermatology topical basket as how Medicare would position

Okay. Just kind of follow-up on that. So basically, is there a way to get a separate classes like a topical PDE4 or just the broad basket that you mentioned?

Yes. It would be difficult to get just a PD4 class. They want to keep the topical products in the same market basket. And actually, that's advantageous for us given

I see. Great. And then just one more question. Any new thinking around the ex U.S. opportunity, especially in Europe based on how Opzelura is performing?

I would say at this point, no change. I think that Opzelura is really a distinct situation, especially because of the label they have in Europe and the lack of comparators for that indication in Europe. I think for

Thank you. And I would now like to hand the conference back over to Frank Watanabe for closing remarks.

Okay. Well, as always, we appreciate all the great questions and appreciate you guys making the time to join us on the call today. I know it's a very, very busy time of the year. So we look forward to talking to you all again in another quarter and hopefully putting up another great number next quarter. Thanks again.