Arcutis Biotherapeutics, Inc. Q3 FY2022 Earnings Call

Good day, and thank you for being here. Welcome to the Arcutis Biotherapeutics, Inc. Q3 2022 Earnings Conference Call. I would now like to hand over the conference to your first speaker today, Eric McIntyre, Head of Investor Relations. Please proceed.

Thank you, Chris. Good afternoon, everyone, and thank you for joining Arcutis' first quarterly earnings call. On today's call, we have Frank Watanabe, President and CEO; Scott Burrows, Chief Financial Officer; Ken Lock, Chief Commercial Officer; and Patrick Burnett, Chief Medical Officer. During this call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. We will then go to Q&A after our prepared remarks. With that, I'll hand the call to Frank.

Thank you for joining us for our first earnings call. Today, we will discuss our third quarter performance and provide updates on our business and the progress we've made this year. You can find the presentation on our investor webpage, starting with Slide 5. We have highlighted that 2022 is a transformational year for Arcutis, with several important milestones already achieved and a significant one on the horizon. This slide showcases our organization's accomplishments over the past three quarters. A key highlight is the launch of ZORYVE 0.3% cream for plaque psoriasis, which is a major advancement in our mission to assist patients and bring innovative solutions to dermatology. The launch is progressing well, and we are building momentum with the right team and strategy, bolstered by ZORYVE’s product profile. We are also exploring further reformulations for conditions like seborrheic dermatitis, atopic dermatitis, and scalp psoriasis, which Ken will elaborate on shortly. I’d like to mention some recent access achievements we announced about an hour ago. These demonstrate the effectiveness of our pricing strategy and the broad, high-quality access we've been aiming for. It's crucial to note that these are fully executed agreements that provide actual coverage for our product from a major PBM and health plan, which enhances the launch momentum with high-quality, differentiated coverage that reduces the burden on prescribers and patients. We are making significant strides in building a sustainable company in medical dermatology by continuing to develop our pipeline. In a moment, we will discuss the Ducentis acquisition and why we are enthusiastic about it. Patrick will also provide detailed insights into the exciting top-line results from the ARRECTOR study involving scalp and body psoriasis. I must highlight how excited physicians are about our foam product for seborrheic dermatitis and scalp psoriasis. This innovation offers competitive advantages, especially for the 40% of psoriasis patients who have scalp involvement, as well as for those with seborrheic dermatitis. We have successfully completed enrollment in both INTEGUMENT-1 and INTEGUMENT-2 studies for atopic dermatitis and are currently cleaning the data and conducting analyses, aiming to share results from both studies before the year concludes. Scott will share more about our financial position, and we feel distinctly competitive in the biotech sector, supported by a strong balance sheet after the equity and debt financings we completed in August. This funding is essential for both the ZORYVE launch and our expanding pipeline in immunodermatology. Turning to Slide 6, many of you may have seen this pipeline slide before. I want to highlight our ongoing progress across various programs as we aim for long-term growth by utilizing our unique topical formulation expertise alongside our comprehensive dermatology clinical development capabilities. These innovations stem from our internal efforts, and Patrick will discuss our preclinical programs further, as well as external innovations from our deal with Ducentis for the CD200R asset. On Slide 7, I'd like to discuss the Ducentis opportunity briefly. We believe this acquisition is transformative, significantly advancing our goal of becoming a leading immunodermatology company. Importantly, we are adhering to our strategy and priorities. This is a large market with substantial unmet medical needs, and it targets a biologically validated approach that could yield a best-in-class molecule. As mentioned previously, we don’t pursue me-too products, and we have never viewed ourselves solely as a topical company. Over half of our teams in medical, commercial, and manufacturing have experience with biologics, which will help us in advancing candidates, including Ducentis, through clinical development and into commercialization. The Ducentis molecule complements our efforts in treating atopic dermatitis alongside roflumilast, enhancing our ability to provide treatment options across a range of disease severity. Lastly, we are proud to have acquired this asset with a modest upfront investment and minimal near-term expenditure, ensuring it won’t significantly affect our financial outlook. We remain excited about the potential of this target, especially given the unmet need in atopic dermatitis despite recent advancements. The market is large and rapidly expanding. While DUPIXENT is a strong medication with new options coming forward, less than half of patients achieve a 75% improvement in their condition. Thus, there is still a significant opportunity to elevate the standard of care. Checkpoint agonism is an exciting emerging strategy in immunodermatology and offers a unique approach compared to checkpoint inhibitors in oncology. By activating the checkpoint system, we can modulate overactive immune cells without significant immunosuppression. Earlier this year, data released by a competitor demonstrated impressive efficacy with a monoclonal antibody against CD200R, including remarkable durability of response even after treatment ceased. This data increased our conviction in CD200R and led us to pursue the acquisition of Ducentis and the corresponding ARQ-234, which is a fusion protein targeting CD200R. We believe that based on the data we have reviewed, ARQ-234 presents an outstanding opportunity for differentiation in terms of efficacy and potentially offers an improved dosing regimen. We look forward to further updates on this program in the upcoming quarters. Now, I’ll turn it over to Ken to discuss the ZORYVE launch in more detail.

Thank you, Frank. Moving to Slide 10, I want to highlight the strong and steady progress we've made since receiving approval at the end of July in promoting ZORYVE and reshaping perceptions of non-steroidal topical treatments for psoriasis patients. ZORYVE stands out as a next-generation PDE4 that offers significant efficacy in difficult areas to treat, along with an excellent tolerability and safety profile. I commend the manufacturing and commercial operations teams for their quick execution following the drug's approval. I'm pleased with our commercial performance, as all leading indicators are trending positively, including physician awareness, intent to prescribe, and overall receptivity to our product. The field feedback has been overwhelmingly positive, building goodwill with the patients we've treated so far, demonstrating that we are fulfilling our promise. Additionally, we are witnessing adoption from not only topical corticosteroids, as we expected, but also from other categories and products, which I will discuss momentarily. Since our launch in mid-August, we've already surpassed 4,000 prescriptions for ZORYVE, enjoying robust double-digit growth over the last six weeks since our field team began full operations. We're also making headway on the payer front, having secured our first major commercial coverage win with the inclusion of ZORYVE on a leading pharmacy benefit manager and a large national health plan. This is a crucial factor in our path towards significant growth and will help us assess the long-term potential of ZORYVE. We're committed to a successful and sustainable launch for ZORYVE while also planning for three other potential product launches in the next two to three years with our foam and cream formulations. Looking at Slide 11, we've observed solid week-over-week demand growth, especially following the full accessibility of ZORYVE to key electronic medical record systems in high-volume dermatology practices and the complete deployment of our sales team. After the early September holiday week, we are experiencing steady growth driven by ongoing interest in the product and our team's effective strategies to penetrate the dermatology community. The demand trends reflect a measured approach to organic growth without relying on temporary incentives like buy-downs or vouchers, which could hinder activity as these programs are phased out. We are confident that our demand will continue to rise, and the next catalysts for this are the initial commercial coverage efforts, which will enable more patients to access ZORYVE with a low out-of-pocket cost of $25. On Slide 12, I’d like to discuss the sources of business for ZORYVE. Currently, about 55% of our patients are transitioning from either topical corticosteroids or steroid combination products, which indicates our ability to penetrate the market and capitalize on the opportunities within topical dermatology. With approximately 2.5 months in the market, we are beginning to see an uptick in refills, which is encouraging, although it's still early in the process. We also see an intriguing trend of patients switching from other agents. Specifically, around 40% of patients are coming from non-steroidal options, including older non-steroidal agents such as calcineurin inhibitors and vitamin D analogs, which tend to be irritating and ineffective. There is also a small migration from psoriasis biologics, where our agents may be added in combination or replace biologics depending on the patient's treatment path. We’ve seen a notable percentage switch from other non-steroidal competitors and from Otezla, which is not viewed as a direct competitor but is seen as an alternative for patients moving from oral to topical treatments. Although we lack specific data on the severity of the patients treated, we know that they encompass a broad range: mild, moderate, and severe cases. Now, returning to Slide 13, I want to reiterate that achieving access to these opportunities hinges on our pricing and access strategy. Our pricing approach aims to secure high-quality access with fewer steps or prior authorizations and faster formulary adoption. These components are crucial for enhancing uptake and maintaining favorable gross-to-net ratios as the financial burden shifts to third-party payers. We are pleased to report that approximately one in four patients have open access to ZORYVE during these early launch stages, with significant increases expected from further formulary wins. It’s important to note that health plans make independent decisions regarding coverage, sometimes even in advance of their primary pharmacy benefit manager contracts. Some investors have previously expressed concerns that a responsible pricing strategy might leave us at a disadvantage compared to higher-priced options with larger rebates, but our recent formulary coverage decision validates our differentiated approach. We are working diligently with our new partners and are eager to share more details about additional successes in the near future. Our agreements are now fully executed, and we have received positive coverage decisions for ZORYVE's inclusion on the formularies of a major pharmacy benefit manager and a large national health plan, with both inclusions anticipated to begin in November. Importantly, these are genuine formulary coverages and not just signed contracts. Given the timing of our earnings call, we felt it necessary to share this update, and we will provide further details about the quality of coverage soon, but we are pleased with the value ZORYVE is being assigned by payers in terms of reducing the burden on prescribers. Moving on to prescriber feedback on Slide 14, it's still early to conduct a comprehensive survey across the field, but preliminary responses have been quite positive regarding physicians' current and future intentions to prescribe ZORYVE. Month-over-month patient initiations are nearly doubling, and the feedback from physicians who have prescribed ZORYVE remains extremely favorable. A significant highlight is that many physicians are impressed by the rapid effectiveness of the treatment. While our trials only required eight weeks to reach endpoints, nearly all patients in the DERMIS study responded favorably, with close to 75% achieving clinically meaningful responses. This contrasts with past experiences with similar mechanisms of action and has generated significant interest as we seek feedback. ZORYVE appears to exceed expectations, particularly at the more severe cases where it's capable of delivering promising results. We anticipated this based on trial outcomes, where we noticed higher efficacy rates in severe cases. Additionally, our unique ability to effectively treat intertriginous areas sets us apart, as we are the only topical agent specifically indicated for these regions. This will be an ongoing point of innovation for us. ZORYVE’s quick impact on itch relief has also been a critical factor, as patients often notice itch alleviation before any visible skin improvement, providing early reassurance that the medication is effective. From clinical experiences and feedback received in the field, we consistently hear how well-tolerated ZORYVE is, reinforcing its safety profile and distinguishing it in the topical psoriasis treatment landscape. Finally, on Slide 15, I want to reiterate the key success factors we've identified for the launch. While achieving net sales realization may take time due to payer coverage decisions, we are focusing on three main pillars: enhancing awareness and usage, improving patient experiences, and ensuring broad, high-quality access, which we've discussed extensively today. Our unique writer numbers have continued to increase, with over 1,300 unique writers and our sales team reaching more than 80% of high-value targets, encompassing around 9,000 healthcare providers in total. We are seeing more refills for prescriptions and a rise in patient awareness, alongside the positive developments regarding access that we've discussed. Now, I’ll hand it over to Patrick for our clinical update.

Thanks, Ken. I'm on Slide 17, and I'll briefly discuss our accomplishments and upcoming milestones. First, I want to highlight the impressive achievements we made in the third quarter that Frank mentioned, and I want to thank our entire team for their support in our R&D efforts. Regarding our top milestone, the FDA approval of ZORYVE, Ken already addressed our launch progress. It's worth noting that dermatologists, including myself, have awaited this significant innovation in topical treatments for decades. There's a tangible excitement as patients and physicians gain experience with ZORYVE, especially as we engage in medical meetings and observe how it's transforming dermatology. In the third quarter, we also made significant strides with our foam program. In September, we released the top-line Phase III ARRECTOR data. I'll share additional data beyond what was in the press release. Additionally, we presented the STRATUM Late-Breaker at the European EADV meeting, which is our Phase III study on seborrheic dermatitis. The presentation received a positive response and increased awareness of our data in this area. For the cream program, we completed enrollment in the INTEGUMENT-1 and INTEGUMENT-2 trials in August. I'll update you on the progress of these programs moving forward. Lastly, our dermis data was published in the Journal of the American Medical Association, reflecting the dedication of our team and the outstanding investigators we've collaborated with. This publication builds on our prior Phase II results published in the New England Journal of Medicine, showcasing the significance of these trials in both dermatology and broader medical fields. Looking ahead, as I mentioned, we completed enrollment in INTEGUMENT-1 and INTEGUMENT-2 for ages 6 and older. We anticipate having top-line data before the end of 2022. Another key milestone is our ARQ-255 program, which features a unique drug delivery technology targeting our JAK inhibitor topically to the base of the hair follicle, where inflammation occurs. Currently, patients with alopecia areata have access only to systemic treatments, so this topical option would be a valuable advancement. We plan to move this into clinical trials by the end of the year and hope to validate this technology. Regarding the seborrheic dermatitis program, our next step is to submit the NDA, which our team is diligently working on for the first quarter of 2023. We expect to hear back from Health Canada around April 30 next year, which is crucial for expanding our reach beyond the U.S. Additionally, we aim to have top-line data in 2023 for our cream atopic dermatitis program involving ages 2 to 5 from the INTEGUMENT-PEDs trial, and we plan to submit an SNDA for roflumilast cream in ages 6 and above, also in 2023. Now moving to Slide 18, I want to provide some insights into our ARRECTOR Phase III studies. We designed the study for participants aged 12 and above, assessing the co-primary endpoint of scalp and body IGA at week 8. We enrolled 432 subjects, randomized in a 2:1 ratio between active and vehicle treatments. The foam formulation is closely related to ZORYVE cream, using the same 0.3% dosage. I can share now that we achieved our primary endpoints for both scalp and body IGA, as well as all secondary endpoints in this study, resulting in a strong data set from these 432 patients. On Slide 19, we see that for the scalp IGA, two-thirds of patients achieved IGA success by week 8, with rapid responses showing one-third of patients reaching IGA success by week 2 and half by week 4. Notably, 40% of patients reached a scalp IGA of clear by week 8, indicating no disease observed on their scalp. Moving to Slide 20, the results for the body IGA mirrored those in previous studies, showing a slight increase in efficacy at week 8, with approximately 47% of patients achieving success. This comprehensive treatment addresses intertriginous disease, which could simplify treatment for psoriasis patients. On Slide 21, Ken emphasized the critical issue of itch for psoriasis patients, especially those with scalp involvement. We found that scalp itch is particularly troublesome, affecting patients' quality of life, and the ARRECTOR study reaffirmed the effectiveness of roflumilast in alleviating itch. By week 8, 67% of patients reported a 4-point improvement in scalp itch, with a quarter achieving this by week 2. Regarding safety, as shown on Slide 22, the tolerability profile for the roflumilast foam is similar to what we have seen with ZORYVE cream studies, with overall adverse event rates being low. Serious adverse events averaged 0.7% across both treatments, and the rates of discontinuation due to adverse events were also low, reinforcing the overall tolerability of our products. On Slide 23, we highlight treatment-emergent adverse events greater than 2% in any group. The only significant deviation from previous data was an incidence of COVID-19, which showed similar rates between active and vehicle groups. Notably, diarrhea rates remained consistent with our psoriasis program. Finally, on Slide 24, presenting data from the seborrheic dermatitis program, we observed 80% of patients achieving IGA success at week 8, with 40% achieving success at week 2, reflecting an early response trend. By week 8, more than 50% of patients demonstrated no evidence of seborrheic dermatitis. We gathered new insights showcased on Slide 25 from the EADV meeting, addressing key disease signs like erythema and scaling. Over 50% of patients achieved an erythema score of 0 at week 8, confirming significant treatment impacts. As we prepare for our NDA submission for this program in the first quarter of 2023, I want to close with Slide 26, discussing upcoming results from the INTEGUMENT studies. We are nearing a readout for this substantial program, with over 650 subjects enrolled in each trial, targeting ages 6 and older, using the 0.15% cream applied once daily. We sized these studies to ensure a robust safety database and strong statistical power for the primary endpoint, and we anticipate strong outcomes as we move toward this readout. Now, I'll hand it over to Scott to cover our financial results.

Thanks, Patrick. We had a couple of very important and exciting financial milestones in the third quarter. First, with the ZORYVE launch in August, the quarter represents our first as a revenue-generating company. And second, we were able to bolster our financial strength in the quarter by raising an additional $285 million on the back of the psoriasis approval leaving us very well-positioned to continue investing in support of both the ZORYVE launch and the continued progress of our pipeline. Turning to the financial results for Q3 on Page 28 of the slide deck. Net product revenues were $725,000 for the quarter. The revenues were driven roughly equally from end customer demand in the quarter as well as the expected initial wholesaler inventory build. Our gross to net discount rate in the quarter was high as expected, given we are still working to secure payer reimbursement, but our discount rate was materially better than other recent branded topical launches given our differentiated pricing and access strategy. We expect modest improvement in the gross to net discount rate in the fourth quarter given the timing of our recently announced formulary coverage with continued progress on delivering more value per script expected throughout 2023. We also expect continued demand growth as the launch accelerates and more formulary coverage is added for ZORYVE. Cost of sales was approximately $270,000 in the quarter. We paid a $7.5 million milestone payment in the quarter related to the FDA approval of ZORYVE. This payment was capitalized and will be amortized straight line over 10 years to the cost of sales P&L line. So that amortization charge for Q3 has an overweighted impact on our cost of sales percentage in the quarter given the modest revenues. We continue to expect our cost of sales margin to be pharma-light in steady state, inclusive of this amortization charge. Research and development expenses were $70 million in the quarter. We incurred a $30 million upfront charge related to our acquisition of Ducentis, which essentially accounts for all of the change in R&D expense on both a year-over-year and quarter-over-quarter basis. Recall that we paid about $16 million in cash for Ducentis and another roughly $13 million in our acute shares. Normalizing for the $30 million Ducentis charge, we expect the R&D line to stabilize going forward. The wind-down in costs from our pivotal studies is counterbalanced by the ongoing cost of the pediatric atopic dermatitis study in the long-term extension study, the regulatory and manufacturing activities associated with the upcoming launches in new indications, and the progression of our next set of topical and biologic pipeline opportunities. SG&A expenses were $35 million for the quarter, increasing largely due to the higher commercialization expenses for the ZORYVE launch, including the hiring of the full sales force. We expect modest continued growth in SG&A as we continue to invest in the psoriasis launch and the upcoming additional launches. Net loss per share was $1.89 for the quarter versus $1.14 for the corresponding quarter in 2021. The Ducentis acquisition contributed $0.51 to this quarter's net loss per share. Turning to our final slide on Page 29. We provide some key balance sheet and cash flow items. We continue to operate from a position of balance sheet strength with cash of approximately $480 million as of September 30. Our cash used in operations for the quarter was approximately $68 million. This does not include both the onetime cash payment of $16 million for Ducentis and a $7.5 million milestone payment to AstraZeneca as both of these items were classified as investing cash flows. Average shares outstanding for the quarter were $57 million, which includes the newly issued shares from our August equity offering as well as the newly issued shares from the Ducentis acquisition. Our quarter ending shares outstanding were approximately 61 million, which may help you in modeling accurate go-forward share count. This concludes the financial update. I will now turn the call back to Frank to wrap up our prepared remarks.

Okay, Scott. So thank you for listening to the prepared comments, and I think we're going to now transition to a Q&A system. Back over to you, Eric.

Yes. Chris, can you open lines for questions?

Our first question comes from Ken Cacciatore from Cowen.

It’s an exciting time ahead with significant data on the horizon. I want to focus on the ZORYVE launch and some of Ken's comments. Your approach differentiates you from your competitor. Ken mentioned a key point about your strategy being executed without accelerants, which is a descriptive term. Could you elaborate on why you believe this strategy is crucial and why you are not being more aggressive with sampling and buy-downs? How does this decision contribute to the preservation of long-term value? Additionally, regarding the recent contract wins, could you provide context on whether you find the value of these initial contracts aligns with your expectations? Is this strategy validation at an early stage? I’d like to hear more about your choices compared to your competitors.

Sure, Ken. That's a great question. I'll break it down, starting with the accelerant. There are several ways to drive RX growth, primarily through organic demand supported by strong clinical profiles. However, various strategies can enhance trends. We've observed other products employing tactics like buy-down opportunities and cash offers that may not support sustainable long-term demand. Such strategies can significantly affect gross finances, and we’ve learned from past examples where companies became too reliant on these approaches and ultimately failed. Our strategy differs in that we are not compelled to pursue high initial volumes through steep rebates to secure access. We’re confident in our clinical value proposition, which has been recognized by both PBMs and plans, allowing us to avoid traditional methods. We’ve carefully considered how to grow our pipeline sustainably and maintain financial stability to avoid any detrimental situations. These are critical elements we keep in mind regarding future launches. Lastly, we understand that many initial tactics to generate volume are often retracted, which frustrates physicians who prefer transparency. Our credibility with patients is vital, and we’ve learned the importance of consistency in what we offer. We hope to maintain and build upon our current momentum with payers while steering clear of the traditional high-priced, high-rebate strategies. Did I address your question adequately?

It did. You did. It was very comprehensive, and congrats on the progress.

The next question comes from the line of Seamus Fernandez from Guggenheim Securities.

So just two quick questions. Just from an expectation perspective, wanted to just get a sense of as it relates to the data that have been presented so far in AD and the data that were presented in your presentation of the FDA's endpoint. Just wanted to clarify as we speak with investors, some are kind of looking at the difference of 1 or 2 point change rather than the 1 or 2-point change with the 2-point differential as the primary endpoint. And just wanted to make sure that that was clarified for investors in terms of what you guys saw in your Phase II results and maybe even provide the slide to refer back to from your 2020 presentation. Just because I think it's important that people have the right metrics in place. Separately, just also wanted to get a sense of what you guys actually think the AD data means for your potential to perhaps more aggressively promote ZORYVE cream heading into the potential approval of that product. Would you change anything related to your promotional strategy at all with regard to couponing and getting more aggressive with the experience that physicians are gaining with ZORYVE? Are you happy with the experience that they're gaining in psoriasis and just looking forward to the new indication? And then just the last question was really, congrats on the early formulary win here. Can you just clarify, is the competitor product TAMA also on formulary? Or are you guys exclusively the product as the formulary win there? And do you see additional formulary wins in the relative near term that could surprise to the upside?

Yes, Seamus. I'm happy to clarify the endpoints. The primary endpoint for INTEGUMENT-1, INTEGUMENT-2, and INTEGUMENT-PED is IGA success. For enrolling mild and moderate patients, they need to show a 2-point improvement and reach clear or almost clear. Clear and almost clear correspond to a score of 0 or 1, while mild and moderate are scored at 2-3, and severe, which we're not including in these trials, is a score of 4. Therefore, a patient starting at a mild level must achieve clear to meet the IGA success criterion. The other endpoint, which is often communicated more widely about this trial because it’s simpler to explain to patients and doctors, is the 2-step improvement required for IGA success. It can be more complex for some to understand the details of the IGA success. However, when discussing with a patient or physician, it's straightforward to say we aim for the patient to reach clear or almost clear, which is easily understood. Regarding our data, we found that about 50% of patients receiving the 0.05 and 0.15 treatment in our Phase II study achieved clear or almost clear, with a vehicle rate of approximately 30% for that endpoint. For IGA success specifically, both 0.05 and 0.15 treatments had success rates of around 37% to 38%, while the vehicle demonstrated a 22% success rate. This 15% difference in IGA success is what we used to design our Phase III studies, as we expect to show comparable efficacy to what we've previously demonstrated in INTEGUMENT-1 and INTEGUMENT-2. It's also important to note that we do not aim to reduce the vehicle rate, as we believe that is a crucial aspect of our product. With that, I'll pass it over to Ken to address the rest of your question.

Yes. So Seamus, good to talk to you. So I'm going to try to tackle the question regarding kind of more aggressive promotion with respect to atopic dermatitis. So clearly, we're a learning organization and I think many things are up for grabs. One thing I'd point you to, though, is obviously the temporal nature of our launch is AD is a little bit farther out and we'd have to sort of understand the landscape with respect to coverage. As you know, with add-on indications, sometimes you're able to kind of leverage the decisions made on earlier products in the portfolio. And if that were the case, you could certainly imagine a different approach, owing to the fact that we have several quarters under our belt with the sensor earnings and be in a different position to maintain kind of sustainability. So I think the shorter answer is, it depends and I think we would reserve the right to kind of dial up and dial down the level of sort of the tactics and approaches we could take. And certainly, I think the competitive intensity would have something to do with that as well. So I can't tell you that we will do anything but certainly, all things are on the table. But clearly, the access picture and kind of where we are as an organization given the downstream launches would play a role in terms of how 'aggressively' we would play that. Now with respect to the formulary, I only speak to us. I think we're still working with our partners to sort of get to the point where we'll fully disclose the details. But I will say that once that comes out, you will have a better picture of kind of the situation we're in. That look for those details soon, but right now we're not at the point where we can sort of fully disclose the position only that we are covered on the PBN and the national level.

Our next question comes from the line of Vikram Purohit from Morgan Stanley.

So from our side, both on the ZORYVE launch. So first, on inventory, what's the typical steady state of inventory you'd expect to have maintained for ZORYVE in the coming quarters? And then secondly, at this point of the launch, do you feel like you've seen enough kind of patient experiences at this point to understand how many tubes per year might be reasonable for people on ZORYVE to kind of work through on an annual basis?

Sure. Vikram, it's Scott. Good to hear from you. On your question around the wholesale inventory piece, it was certainly noticeable, I think I mentioned in my prepared comments, about half of the sales in the quarter related to the build. I think I would just say that we don't expect it to be a meaningfully contributor. We expect the pickup in demand-driven strips to be the main portion of sales going forward. Now you've probably seen from other companies, wholesale inventories do fluctuate. It's just hard to predict these things. And so we'll be sure to call out when wholesaler inventory impacts the sales in the quarter. But again, the proportion we saw in Q3 was driven by the initial build-out launch. I'll hand it off to Ken to talk about your second question.

Yes, it's still very early in the launch phase regarding refill rates, so we don't have confirmed data that would lead us to adjust our previous comments about expecting 3 to 4 tubes. Most patients have only received their first tube so far, which can last 2 to 3 months depending on body surface area. It will take time to gather more information. What's encouraging is that we are not seeing many refills, which indicates that patients are having positive experiences and achieving the efficacy they desire. These are good signs, and we feel confident about our tube guidance for now, so it is too early to change that expectation.

Our next question comes from the line of Louise Chen from Cantor.

Congratulations to all success this quarter. I had a few questions for you. So first one I had for you was that I know there has been a lot of focus on the initial launch prescriptions and it's probably too early to draw any conclusions here on peak sales potential. But when do you think you'll actually hit your stride here? And then second question I had for you is physician feedback on ZORYVE. Why do people like it? Why are they prescribing it? What drugs are they switching from? And then last question I had was just on AD. The INTEGUMENT-1 and 2, are you filing with that data? Or are you going to wait for PED?

Sure. Hey, Louise, it's Ken. I think we mentioned earlier that the momentum we have, along with increased payer access, will really serve as a turning point for us. I'm not entirely sure what you mean by hitting our stride or peak, but I believe we are making good progress at this stage. Of course, there is still more work to be done with the payers. Today marks an important point for us, but we have several more victories to achieve in order to fully realize our potential. We believe that reducing the burden on prescribers is crucial for the success and broad adoption of our products. Until we complete that work, it's difficult for me to say that we are fully operational. That is the benchmark you should look for to determine our full execution. Regarding the feedback on the drug, I previously mentioned that we have received a lot of positive responses. We have been actively engaging in the field to listen and learn. Earlier in my slide deck, I highlighted the various products from which people are switching. On Slide 12, you can see a range of products listed. Most of these are topical corticosteroids, which is the target market for all newer topical products. We are also seeing newer branded products and alternative steroids like vitamin D and calcineurin inhibitors being displaced. There’s a diverse range of products being switched from, although the majority are topical steroids. Patrick, do you have anything else to add regarding the feedback or other considerations for usage?

Yes. From our discussions with dermatologists and other healthcare providers, we're not hearing about a single type of patient. It's not being identified solely as a drug for intertriginous areas. We're receiving feedback from a wide range of patients who are transitioning to a biologic. Some patients are being prescribed ZORYVE, and many are switching from topical corticosteroids. The diverse sources of these patients really bolster the clinical profile we observed. It works effectively on knees and elbows, but it can also be applied to more sensitive areas like the face and intertriginous regions. This is a significant differentiator compared to topical steroids for most patients. Regarding our atopic dermatitis submission plan, we aim to share the results from the INTEGUMENT-1 and INTEGUMENT-2 studies before the end of this year. Our strategy is to submit a supplemental NDA for the cream for patients aged 6 and up, which will include only data from this age group. We will not include the INTEGUMENT-PEDs trial, which involves a different dose for ages 2 to 5. After obtaining initial approval for ages 6 and above, we plan to file another supplemental application to include data for ages 2 to 5 and expand the label to that younger age group. This is our current plan.

Our next question comes from the line of Chris Shibutani from Goldman Sachs.

This is on for Chris. We have one on ZORYVE and then one of the upcoming Atopic Derm data. On ZORYVE with the recent formulary and PBM wins, can you speak to the percent of covered lives on a national basis? And then for the INTEGUMENT studies, the Phase III studies are recruiting a slightly younger age than was studied in the Phase II. Can you just remind us what went into that decision and how you expect that to affect the ultimate outcome?

Steven, this is Ken. So we won't be speaking to covered lives today. Look for a future announcement on that front with all the details once we work through with our partner. So that's not something we're announcing at this moment, but hang tight on that one. Patrick?

Yes. So with regard to atopic dermatitis, the difference in the ages. In our Phase II study, we studied down to ages 12 and above. This submission for INTEGUMENT-1 and INTEGUMENT-2 and the upcoming data readout will be ages 6 and above. So we don't really see this as a significant risk to the program. When we've looked over other data from both PDE4 inhibition in atopic dermatitis, topical treatments as well as systemic treatments, we're not really seeing how patients across these different age groups are responding differentially to therapies. And in particular, AD treatment with PDE4, there's a lot of history there that really gives us support that we anticipate the similar kind of effect even going down into those younger age groups. So we're very confident about the consistency of our results and especially with this next readout, we're only extending the age from 12 and above down to 6 and above.

Our next question comes from the line of Uy Ear from Mizuho Group.

So I guess my first question is, I think you previously mentioned that depending on how quickly you can analyze the data, you're not committed to reading out INTEGUMENT-1 and 2 at the same time. Just wondering if this is still true. And I guess my second question is, could you sort of help us understand why you wouldn't decide not to submit, I guess, the ARRECTOR data and the STRATUM data for the foam formulation at the same time? Is it primarily just because of the speed and analysis? Or is it something else? Because it seems that waiting a couple of months, it's probably better than maybe 10 months or more, I guess. And my third question is, given everything that we know today, particularly with respect to the formulary win, could you sort of help us understand a little bit what you think the gross to net could be next year?

Yes, this is Patrick. We concluded recruitment for INTEGUMENT-1 and INTEGUMENT-2 about three weeks apart in August. We expect this time difference to persist until we have the final data. Our current plan is not to wait for both studies to report together unless an event occurs that reduces the three-week gap. If things remain as they are, we will present the results of one study first, followed by the other separately. Regarding the timing for ARRECTOR and STRATUM, and the submission for the foam formulation, we believe that given the time difference in the readouts for the seborrheic dermatitis and scalp psoriasis data—especially since there has been little development in seborrheic dermatitis and patients are eagerly awaiting treatment—we feel that delaying the submission would not be beneficial for patients or for us as a company. Therefore, we are proceeding with the submission for seborrheic dermatitis, and as soon as we obtain approval, we will file a supplemental application for scalp psoriasis.

Yes. I would add that Wall Street may not fully recognize the significant opportunity presented by seborrheic dermatitis. The excitement within the dermatology community about the foam treatment for seborrheic dermatitis is likely the highest among all our indications. This condition has been largely ignored for 40 years. Last week, Patrick, Ken, and I were in the field and learned that dermatologists are encountering more patients with seborrheic dermatitis than those with psoriasis daily. They are eagerly anticipating the foam treatment for seborrheic dermatitis. As Patrick mentioned, we thought it was inappropriate for patients or our company to delay the submission even by a single day. We want to expedite this process so we can assist dermatologists in treating their seborrheic dermatitis patients. I believe Wall Street will come to understand the vast potential this opportunity presents for us regarding 154 in seborrheic dermatitis.

Thank you for the question. Looking at the third quarter, if you consider the commentary regarding our inventory build alongside the weekly demand data, I believe the gross net range for the quarter will be approximately 70% to 80%. As we look forward to the fourth quarter, we are excited about the announcements made today regarding formulary coverage. Given the timing of these developments within the quarter, we expect the improvement in gross to net for Q4 to be relatively modest. However, as we move into 2023, we feel optimistic. We anticipate that additional formulary coverage will continue to roll out, putting us on track for a long-term gross to net discount rate of roughly 40% to 50%. We expect this to follow a base case timeline of around 12 to 18 months from launch, and we are doing everything we can to expedite this process. The announcement made today is a positive step towards that goal.

Our next question comes from the line of Greg Fraser from Truist.

I wanted to ask about the feedback. Curious, specifically for feedback that you've been hearing from docs that have been prescribing the other new drug in the class B TAMA. And on the switching, what are the reasons that you've heard for docs switching patients from the TAMA? Are the switches happening for efficacy reasons or more about side effects? Any color there would be helpful.

Yes. So I would just say we don't have any direct feedback from doctors on why they might switch from 1 drug to another drug. The switching data we're getting through secondary sources, yes, I don't know that there's a whole lot more we can say about that at this point in the game. In terms of feedback, it seems that there is consistent admiration for the speed of ZORYVE's effectiveness and the results observed, especially with challenging plaques. Additionally, we rarely hear any concerns regarding the tolerability of ZORYVE, which is a notable distinction compared to other topical treatments available. All other topical products they use, aside from ZORYVE, tend to have significant local tolerability issues, whether they are steroids, TCIs, vitamin D, vitamin A, or other alternatives. Doctors have been positively surprised by how well patients tolerate ZORYVE, and this has been a frequent topic in our conversations with users.

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

A couple of quick questions. I guess for Ken on the coverage of ZORYVE. I know it's only been a couple of months since the approval and the launch. But curious if your initial assumptions of being at steady state coverage and gross to nets of 40% to 50% within 12 to 18 months are still intact? And then secondly, since ZORYVE is launching and competing directly with another topical product for the same indications, should we expect to see some exclusive formulary wins for either ZORYVE or the other products?

Sure. To start with the first question, we do expect that within the timeframe we've mentioned before, which is 12 to 18 months, we will achieve a steady-state growth that aligns with the industry benchmark of about 50%, indicating strong performance. We're on track to reach that. While I can't specify exactly when we'll have those wins, it's clear that our efforts are being validated and we're working to accelerate progress. It's somewhat unusual for a product to receive such extensive coverage so quickly, so we're pleased with this development. However, it might be premature to predict subsequent wins just yet. I believe that 12 to 18 months is a reasonable timeframe. Regarding exclusivity, payers are generally hesitant to grant exclusive contracts or exclude other products early in the lifecycle. This tendency usually becomes more common in mature markets or when there is a clear incentive. Initially, payers tend to monitor volume uptake and the factors driving that volume while assessing market dynamics, ultimately evaluating costs. We've observed this in other competitive sectors, particularly within dermatology and biologics, where activity tends to ramp up later rather than at the onset. Additionally, payers are cautious about making commitments too early, so I wouldn't expect to see significant exclusivity developments emerge quickly.

I would now like to turn it back to Frank Watanabe, CEO, for closing remarks.

Thank you all for joining us on the call today. I appreciate the insightful questions from everyone. I want to take a moment to recognize the Arcutis team. We've discussed our achievements in 2022 and Q3, and those successes wouldn't have been possible without the dedication and expertise of our entire team. Patrick, Ken, and I may be the faces of the company, but it's our staff who do the essential work. I extend my gratitude to them for their hard work and commitment to our mission of bringing these therapies to patients. Thank you again, and we look forward to speaking with you next quarter.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.