Arcutis Biotherapeutics, Inc. Q1 FY2023 Earnings Call

Thank you, Marc. Good afternoon, everyone, and thank you for joining Arcutis' First Quarter 2023 Earnings Call. Slides for today are available on the Investors section of our website. On today's call, we have Frank Watanabe, President and CEO; Ken Lock, Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and Scott Burrows, Chief Financial Officer. During this call, I'd remind everyone that we will be making forward-looking statements. These statements are subject to certain risks and uncertainties and our actual results may differ materially. We encourage you to review the information disclosed in our latest SEC filings. With that, I'll hand the call over to Frank to kick us off.

All right. Thanks, Eric. So I am on Slide 5 of the deck, for those of you who are following along in the deck, and provide a high-level overview. During the first quarter of the year, we made strong progress in laying the foundation for sustained long-term growth at Arcutis. I'll start with ZORYVE, our innovative product for plaque psoriasis. We believe this product is very well positioned for long-term success with the real potential to eventually replace topical steroids. Physician and patient feedback has been exceedingly positive, and the launch continues to build momentum. We're seeing encouraging script growth as physicians gain positive real-world experience with ZORYVE. We roughly doubled our TRxs quarter-over-quarter in Q1, and we see continued growth in April. I think it's worth noting that we're at the last five branded topical launches have seen growth stall somewhere between three and six months into the launch. We have now continued steady growth through nine months of our launch. We also continue to make progress on gaining broad high-quality access for patients to ZORYVE. We now have coverage at two of the three large PBMs as well as a number of other large downstream health plans within just six months of our launch, and we're making good progress with the remaining large PBMs. We have now over 110 million commercial lives, which is about two-thirds of the commercial market. And I think it's important to note that over 90% of those patients have access to ZORYVE without a prior authorization, which meets our goals for high-quality access for ZORYVE. We believe we should be able to get to over 80% commercial coverage before the end of 2023 and likely even sooner than that. I will note that while obtaining coverage is a necessary precondition for patients to gain access, it is not alone sufficient. And we are augmenting our field-deployed forces to increase our pull-through of that coverage into covered prescriptions, and Ken will talk a little bit more about that a little bit later. At the same time, we've made continued progress on regulatory milestones to expand to additional indications and geographies with topical roflumilast. We received a confirmation of our PDUFA date for the foam in seborrheic dermatitis in mid-December, which is setting us up for our first launch of the foam. We believe this product is massively differentiated, and there's a very high level of physician excitement around this product and a very high sense of customer urgency for this product given the unmet needs in this area. We also recently received the approval of ZORYVE cream in Canada for plaque psoriasis, and the launch in Canada is going to be in the next coming couple of weeks. Obviously, it's a smaller market than the U.S., but we still think it's a very attractive opportunity. And this represents the first regulatory approval for ZORYVE outside of the United States, which is another key milestone for Arcutis. We also had a presentation of late-breaker data from the INTEGUMENT-1 and INTEGUMENT-2 trials in atopic dermatitis at the American Academy of Dermatology meeting in March. We continue to get very positive physician feedback on the clinical profile in AD, especially the early onset, including the impact on itch in as little as 24 hours, which was presented at AAD, as well as the differentiated safety and the tolerability profile, which is particularly important in atopic dermatitis. And we expect to file for approval in ages six and above in atopic dermatitis late in the third quarter or early the fourth quarter of this year. We also just recently completed enrollment in the INTEGUMENT-PED study in ages two to five, and we expect to see top line data from that study in Q3. I would note that that will be a supplemental NDA, so that data is not a critical path for the aforementioned filing late Q3, early Q4 in six and above. Really, so that we can capitalize on this incredible opportunity, we are adjusting our capital allocation priorities, and we're making some specific adjustments to drive success in our commercialization efforts, and Scott will provide some more details on that shortly. Turning to Slide 6. I think topical roflumilast really represents a pipeline in a product with potentially four unique products in one and multiple inflection points coming up ahead with potentially new launches every two or three quarters for the next several years. So with ZORYVE today, we're competing in a market of around two million topically treated psoriasis patients in dermatology offices in the U.S. The total TAM effectively doubles in size with the expected approval of seb derm to more than four million patients in the dermatology office in the U.S. And then the TAM will nearly double again to almost seven million patients in dermatologist's offices with subsequent launch in AD, and then there's nearly as large an opportunity outside of the dermatology office with about six million additional patients being topically treated outside of dermatology offices, mostly in primary care and pediatrics. We do plan on a capital-efficient partnership to allow us to access this broader opportunity outside the dermatology office rather than building our own sales team. When you factor in all of these different opportunities, that's a six-fold increase over our current psoriasis market that we're targeting at the moment with ZORYVE. And I think that really speaks to the long-term potential of topical roflumilast and Arcutis in the space. We think that the topical roflumilast product profile is ideally aligned with what physicians and patients need and are looking for. And as I mentioned before, the catalyst path really sets us up very nicely for a potential new launch every two to three quarters with seb derm at the beginning of 2024, atopic dermatitis later in 2024 and then scalp and body psoriasis early in 2025. And with those introductory remarks, I'm going to turn things over to Ken.

Thanks, Frank. I'm now on Slide 8. Our commercial performance shows that our launch momentum continues to grow, reflecting steady prescription growth supported by exceptional product feedback. As Frank pointed out, we've almost doubled the TRx volume quarter-over-quarter and increased new prescription growth by nearly 80%, maintaining positive momentum into Q2. We've received outstanding feedback regarding ZORYVE's product profile from both physicians and patients, particularly noting its rapid efficacy and effectiveness in treating challenging plaques, including those on palms and soles, along with sensitive areas. Physicians report minimal tolerability issues. On Slide 9, we examine the drivers of our ongoing growth through market research. Dermatologists are increasingly favoring ZORYVE as positive patient experiences and clinical findings accumulate. On the left, we see the growing preference for ZORYVE among physicians over time. Initially, during the launch, many prescribers were trying both new products without a strong preference, but as they gained clinical experience, more are shifting their preference to ZORYVE, doubling since we began tracking this in November 2022. Consistent with our discussions, ZORYVE's tolerability and safety profile are major reasons for this preference, closely followed by its efficacy and speed of onset. It's vital for physicians to build confidence in topical roflumilast as we prepare for additional indications, as their current experiences will greatly influence future launches. On the right side of the slide, we highlight the new prescription trend, which indicates significant brand choice dynamics. For ZORYVE, we observe a positive trajectory that suggests a leading indicator for repeat business. We believe that as prescriber preference solidifies, ZORYVE will be increasingly selected for eligible patients over alternatives. As Frank mentioned, other recent topical launches haven't sustained growth trajectories for nine months, making our current progress encouraging. On Slide 10, we detail the source of ZORYVE's business from launch to date. We're pleased that as our volume increases, two-thirds of our business is coming from topical steroids and steroid-containing combinations, with the remainder from older non-steroidal products such as vitamin D analogs and topical calcineurin inhibitors, as well as a robust share of competitive branded products for plaque psoriasis. We see a significant long-term opportunity in converting a substantial portion of the topical steroid market with ZORYVE. Moving on to Slide 11, we've established extensive high-quality access for ZORYVE, which will drive further demand and gross-to-net improvements. Approximately nine months post-launch, we have coverage for two-thirds of commercial lives in the U.S., over 110 million lives, of which more than 90% are covered without a formal prior authorization requirement. This ease of access is crucial for transitioning patients from steroids to ZORYVE. On the right side, we summarize our access and coverage goals backed by our responsible pricing strategy, which focuses on preserving long-term gross-to-net, optimizing volume and franchise value, securing high-quality coverage with minimal step edits and prior authorizations, and achieving faster formulary adoption, which we've seen with major payers. While we've made significant progress in securing formulary coverage, we now need to translate that coverage into reimbursed prescriptions. We’re addressing delays in coverage implementation at downstream plans and helping pharmacies correctly classify covered patients. We've expanded our reimbursement support and pharmacy education efforts to ensure coverage translating into paid prescriptions, especially where we've implemented these initiatives, and we're witnessing improvements. We’ve also experienced typical first-quarter challenges, such as changes in insurance plans and deductible resets, which have impacted our copay offset costs. However, we expect improvements as the year progresses. Importantly, we are establishing necessary payer coverage to effectively convert the topical steroid market with ZORYVE. In conclusion on Slide 12, I want to revisit the three main pillars of our commercial success that support sustained ZORYVE growth. We are driving physician awareness and expanding our prescriber base, now exceeding 6,000 unique writers, a 50% increase since Q1, aligned with our volume growth. Although our reach is expanding, there is still considerable opportunity for targeted healthcare providers to benefit from ZORYVE. We receive daily testimonials from patients highlighting their positive experiences with ZORYVE, with refills contributing over 20% to TRx weekly in April, reflecting the confidence our prescribers have in continuing to prescribe the product. As our coverage improves, we’re also assessing the right timing to enhance our current direct-to-consumer efforts, including targeted marketing approaches. Lastly, our broad high-quality access continues to develop, with coverage secured at two of the three major pharmacy benefit managers, meeting our quality standards of minimizing step edits and prior authorizations. All our indicators, such as prescriber sentiment, patient reception, and various launch metrics, point upwards. We are continually learning and adapting our strategies to maximize the number of patients able to benefit from ZORYVE. With the foundational elements largely established, we anticipate delivering on ZORYVE's long-term promise. I will now turn it over to Patrick for an R&D update.

Thanks, Ken. I want to briefly discuss our atopic dermatitis and seborrheic dermatitis programs before updating you on upcoming milestones. As investors know, atopic dermatitis is a key opportunity for topical roflumilast, and physician feedback on our data has been very positive. The speed of onset observed in our trials stands out, indicating early effectiveness of the drug, along with important safety and tolerability data that are crucial for the product profile. This aligns with our itch response across all indications, as itch is a critical concern for patients with atopic dermatitis. This condition is often described as the itch that rashes, making it a vital early indicator for patients to recognize that the drug is working. Looking at our recent presentation data, we showed a statistically significant improvement in itch just 24 hours after the first application of the drug, continuing at all time points across both pivotal Phase III trials. This early symptom response is precisely what patients and healthcare providers expect when starting treatment for atopic dermatitis. Now shifting to our foam program for seborrheic dermatitis, the recent FDA acceptance of our application is a major milestone, and we are anticipating approval in December. There is growing excitement within the physician community due to the strength of our topical roflumilast data, especially since options for these patients are currently limited. Roflumilast foam would be the first topical treatment for seborrheic dermatitis in decades. Regarding our Phase III data, over 40% of patients achieved IGA success by week two, increasing to 80% by week eight, which was our primary endpoint. This suggests that 50% of patients experienced complete clearance at the eight-week mark. We also observed a significant impact on itch, a major symptom for seborrheic dermatitis, although those data are not included in this presentation. These efficacy levels are unprecedented for a topical treatment. I want to note that these impressive results are from our registrational Phase III study and mirror the remarkable results from our recently published Phase II study in the Journal of the American Medical Association. The foam formulation appears to meet patient needs and offers strong competitive differentiation in the market. To conclude my R&D update, I’ll summarize our milestones. These opportunities represent the potential for significant, sustained growth through additional approvals and expanded geographies, as well as label expansions. Notably, we recently received approval for psoriasis in Canada, the first non-steroidal treatment approved there in over 25 years. Canada was integral to the development of ZORYVE, contributing over a third of clinical trial participants, which has fostered excitement within the dermatology community for Arcutis. Regarding atopic dermatitis, we updated our sNDA submission timeline to late Q3 or early Q4 of this year, which will include ages six and above. We also completed enrollment of our INTEGUMENT-PED trial for ages two to five, with top-line results expected in Q3 of 2023. This will be a significant data set for our differentiated profile in atopic dermatitis. Thank you for the opportunity to provide this R&D update, and I’ll now hand it over to Scott for the finance update.

Thanks, Patrick. Turning to Page 18 of the slide deck. Net product revenues were $3 million in the first quarter, in line with our prior guidance. Strong unit demand growth, which doubled sequentially, was offset by the anticipated higher gross-to-net in Q1. As Ken discussed earlier, Q1 gross-to-net was higher quarter-over-quarter due to the typical first-quarter insurance deductible resets and the dynamics in getting our prescriptions covered by insurance. We expect gross-to-net will improve through the balance of 2023 based on our ability to continue to expand our high-quality commercial coverage and our continuing efforts to translate that coverage into covered prescriptions. For Q2 specifically, we expect that sequential net sales growth will be driven primarily by the continued demand growth we are seeing with improving gross-to-nets only modestly contributing quarter-over-quarter. For the balance of 2023, we expect revenue growth to be driven by both demand growth and further gross-to-net improvement. Turning to the rest of the P&L. Research and development expenses were $35 million in the quarter and included a one-time $3 million NDA filing fee for seborrheic dermatitis. The decrease year-over-year is primarily due to lower clinical development costs for our topical roflumilast programs. SG&A expenses were $43 million for the quarter as we continue to invest in the ZORYVE launch and the upcoming launches in seborrheic dermatitis and atopic dermatitis. Net loss per share was $1.31 for the quarter. Turning to our final slide on Page 19, we provide some key balance sheet and cash flow items. We remain well capitalized with cash of $333 million as of March 31. We are excited about the progress we're making in these early innings of the ZORYVE launch and in our ability to drive increased shareholder value. We also recognize the criticality of continuing to invest in the growth of the launch in psoriasis as well as prepare for the follow-on launches in seborrheic dermatitis and atopic dermatitis. In response, we are taking proactive steps to reduce R&D spend, specifically investment in our early-stage pipeline, as well as spend in other areas of the company to ensure we have the resources to invest in the launch. For the remainder of 2023, we would expect R&D quarterly op-ex to be modestly down sequentially, with more significant declines in 2024 as the remainder of our roflumilast clinical program approaches completion. We are reducing planned expense growth in G&A areas as well, but still expect overall SG&A expense to grow modestly as we continue to fuel the ZORYVE launch and prepare for our next two product launches in 2024. In addition to these prioritization efforts, we have made meaningful progress in our ex-U.S. out-licensing efforts with the potential to further strengthen our balance sheet with non-dilutive capital. This concludes the financial update. I'll now turn the call back to Frank to wrap up our remarks.

Okay. Well, thanks, everyone, for joining us for the call today. I know for our East Coast colleagues, it's late in the day. So we appreciate you making the time. And with that, we will open things up to Q&A.

Our first question will come from Vikram Purohit of Morgan Stanley.

We had two questions, both related to the ZORYVE launch. One concerns reimbursement and the other pertains to patient usage dynamics. Regarding reimbursement, you noted that it is taking longer than expected to achieve the gross-to-net levels you aimed for. Could you explain what has contributed to this delay? Additionally, what strategies do you anticipate implementing over the next six to nine months to help reduce the gross-to-net? As for patient usage, you mentioned that about 60% of patients are transitioning from topical corticosteroids to ZORYVE. Are you observing this as a straightforward one-to-one switch, or are patients who were using topical corticosteroids also incorporating ZORYVE alongside them, combining different therapies? We ask this to better understand the duration of usage. If you could provide insights on duration and the estimated annual usage in terms of tubes, that would be appreciated.

Sure. So Ken, maybe you can take that, and then Patrick, if you have any additional color from a clinical standpoint.

Yes, I'll start by elaborating on some of the dynamics and underlying causes I mentioned earlier. First, there's some inertia from before we had coverage, where the only way to get patients their medication was to process it as non-covered. Even with coverage now available, we need to educate and work with pharmacy networks to ensure prescriptions are processed correctly. Second, there's been a delay in implementing coverage. As Frank mentioned, we've made progress with payers, but it takes time for these changes to filter down into the plans and for the systems to acknowledge the coverage. Third, having coverage doesn't automatically lead to reimbursed prescriptions. For instance, at one PBM, there may be additional criteria that we need to meet, such as including the correct diagnosis codes and information about previously tried medications. This highlights the importance of execution at the office level and ensuring that prescriptions are handled correctly from start to finish. That's why we've increased our educational efforts and expanded our field presence to enhance our approach to reimbursement, aimed at improving the rate of covered prescriptions. We are addressing these challenges, and while we haven't provided specific guidance on the timeline, we are encouraged that our internal copay offsets are decreasing, indicating more prescriptions are being correctly processed. However, the dynamics of the first quarter complicate this picture. We noted challenges related to implementing coverage and shifts to high deductible plans, where a larger number of healthy patients are choosing plans that result in higher costs falling to the manufacturer. We expect this issue to resolve as the year progresses and patients move beyond their deductibles. Regarding your second question about the ratio of TCS to ZORYVE, we observe a variety of use cases, including patients on multiple steroids switching to ZORYVE and those on a single steroid also making the transition. We are also seeing combined use cases. It's a mixed situation and doesn't follow a strict one-to-one ratio. However, I want to reaffirm our confidence in the tube utilization guidance we've shared previously. We're observing an increase in refills, with some patients now reaching their fifth refill. While we still need more time to determine the exact ratios, I remain confident that our guidance on tube use remains valid.

Just to add a little bit on the clinical context of that. I think the real value of this product to patients with skin diseases, patients with psoriasis and the doctors and healthcare providers who take care of them is the eventual ability to manage these conditions without the use of a steroid. The patients have grown up their whole life using topical corticosteroids, and the doctors that we're working with have throughout their training and their whole practice used these. So I think as experience grows within the patient, within the healthcare providers, that comfort in being able to move patients over to being treated as monotherapy with ZORYVE so that they don't have that exposure cumulatively to topical corticosteroids that we know from publications is associated with bone demineralization and some of these other side effects that we associate with systemic exposure to steroids, I think, is a real benefit. And as Ken mentioned, we're already starting to see like all of these different ways that doctors are using this as a tool to treat their patients. But I think over time, what we're going to start seeing is more and more of a shift towards treating patients with monotherapy because of the fact that this profile supports being able to treat the disease no matter where it occurs on the patient. And that will only be more true when the foam is approved for patients with scalp psoriasis, because then you really will be able to treat it from head to toe, every single place the disease manifests.

And our next question comes from Seamus Fernandez with Guggenheim Securities.

Great. Thanks for the question. So it sounds like the coverage implementation has been a bit challenging. I'm just trying to better understand what we're looking at in terms of scripts written versus scripts filled and if we're seeing abandonment of scripts at a higher level, or if there is substantial couponing such that we'll see a stronger directional change as we move into the second and third quarters of this year. Just trying to get a little bit of a sense of how the coverage implementation is going to be coming on in the subsequent quarters. And then just my second question. Can you talk a little bit about how the coverage implementation is likely to be applied to the potential approval of the foam formulation? Certainly in the feedback that we're getting from physicians with active experience with ZORYVE is only quite a bit greater in terms of the enthusiasm, not just for the seb derm indication, but for the broader utility of the foam formulation. So just hoping to get a better understanding of how the current coverage that you've really battled for and fought for and priced for is likely to play through into the launch of the foam formulation next year.

All right. So, Seamus, good to hear from you. You guys are going to keep Ken busy today. So Ken, I'll let you handle Seamus's question.

Sure. Thank you, Seamus, for your question. We haven't specifically discussed fill versus abandonment rates before. However, I can tell you that our copay programs significantly reduce concerns about abandonment, leading to reasonably high fulfillment rates because we support both covered and non-covered patients. For instance, if you are part of the initial PBM approval, you would be eligible for reimbursement under the right criteria, which would make it a covered prescription. Regarding the implementation delays, we anticipate those issues are mostly resolved now, and we have one more PBM joining us soon. These developments should positively impact the rates of covered prescriptions. Historically, abandonment hasn't been a significant issue as long as we have a non-covered copay offer to address it. The focus is on ensuring we capitalize on the coverage we obtain promptly. This requires us to provide accurate patient information at the office and ensure prescriptions are correctly processed at the pharmacy as covered patients. Both elements must work together for us to make the most of the coverage negotiated at the PBM level. Looking ahead to the coming quarters, I'm excited about fully implementing our two PBMs and onboarding our third in the middle of the year, which should significantly enhance our ability to capitalize on coverage and benefit from the education we are currently providing to offices and pharmacies about getting ZORYVE covered. I believe this trajectory is going to improve in terms of implementing coverage. Regarding your second question on subsequent indications, the good news is that launching a new product isn't like starting from scratch. Some of the PBM contracts we've negotiated consider the next indication, such as seborrheic dermatitis, to be a line extension. This means the coverage for the current psoriasis indication could also apply to that. We won't start from zero with every payer, but some of our negotiated contracts do allow for this. Therefore, we shouldn't face significant setbacks by introducing a new indication; in fact, we believe it will encourage a smoother uptake due to the existing coverage for that indication.

Perfect. Super helpful. And then just a final question. Frank, I think you mentioned in some recent meetings that the target gross-to-net you anticipated achieving by the end of the year was somewhere between 40% and 60%. I wanted to get a sense of whether we are consistently on that trajectory. Should we expect the balance of the remainder of the year to come in a linear fashion, acknowledging that this quarter is clearly the low point in that regard? I'm not sure if it's a high or low watermark.

Yes. Sure, Seamus. So just to clarify, I don't believe I've ever put a timeframe on when I thought we would get to our steady state gross-to-net. We do continue to believe that we'll get to something around the 50-ish sort of range, 40% to 60% range, which is about as good as anyone performs these days. How quickly we get there I think is still to be determined. There's obviously the coverage decision at the PBMs, and as Ken mentioned, we've seen some implementation lags. But then also there's the follow-on, given the downstream health plans making formulary decisions. We announced, for example, some decisions in April that were a reflection of the coverage that we got at Express Scripts in November. So there can be a fairly significant lag there. So at this point, I won't say that we'll get there by the end of the year. But certainly, we expect to see continued progress, as Scott mentioned, quarter-on-quarter throughout the year. And we do continue to believe that we will get to that sort of 50ish sort of range on the gross-to-nets.

And our next question will come from Uy Ear of Mizuho.

My first question is whether you could provide more clarity on what you're doing to address the processing issues. I'm trying to understand what's happening in the doctor's office. Is it related to difficult coding, or is it a software problem? I would like some additional clarification. My second question is whether you could quantify how many prescriptions had these issues and how many might have been affected by seasonal fluctuations.

Yes. So Ken, I think it's back over to you again.

Okay. I'll just keep speaking. Let me begin by explaining what is happening at a high level. When you receive a coverage decision and some formulary implementation, there are specific criteria that need to be met to access that coverage. There are conditions that the patient must fulfill. For example, the insurance company needs to confirm that the patient has been diagnosed with plaque psoriasis, which means the diagnosis code must be included in the prescription. Additionally, any information related to the utilization management of that payer is required, such as what therapies the patient has already tried. Both pieces of information must be included in the prescription for the payer to agree that the conditions have been met and approve payment for that prescription. These aspects occur in the office, and various dynamics can affect whether or not those conditions are satisfied. This is what we are focusing on, ensuring that every office understands these criteria, which is quite common for most branded products. We are looking at how we can continue to educate those who input these prescriptions to know what is necessary to obtain ZORYVE. A significant part of our effort involves our field team, including sales representatives, who are spending time with these offices to ensure they have a clear understanding of the requirements. This issue is not centered around software but rather on the consistent application and documentation of these criteria to facilitate prescription processing. Another key aspect is ensuring that pharmacies understand we have coverage, and that patients with this type of coverage are processed accordingly. We strive to ensure they utilize this route for covered offers. Both elements need to work together to ensure you receive a covered prescription. We are concentrating on these areas, primarily through education rather than technical issues in the offices. We have not discussed the proportion of prescriptions facing these challenges, as that is a somewhat indirect way of addressing coverage status. However, we know that currently, only a minority of prescriptions are coming through as covered in Q1, and we are working diligently to enhance this situation. These issues can arise at multiple points, both during prescription initiation and processing at the pharmacy level. Our focus remains on partnering and educating in these areas, which is the priority of our field-based team at this time.

Our next question comes from Tyler Van Buren of TD Cowen.

So as a follow-up to a previous question on the third and final major PBM that you said will come online by midyear. Can you offer any additional color around these ongoing interactions and if you think it's likely to include no prior authorization like the first two PBMs and if perhaps one or two step edits would be required.

Yes. We cannot comment on the final ruling at this time. During the initial negotiations, we are discussing the value proposition of our products with the payers and advocating for different levels of utilization management. While we are optimistic about the timing, we cannot guarantee anything. However, like with the other PBMs, we believe that responsible pricing should lead to better terms or more favorable utilization management. Our aim is to minimize step edits and ultimately eliminate prior authorizations. This has been our focus so far, and it aligns with our approach as we consider the next PBM.

Yes, I would like to provide some additional insights. If you examine our history regarding coverage, we've shown that we can secure it more quickly and often with better terms than many of the recent branded topical launches. We are pleased with our progress and feel optimistic about the third PBM. Also, I believe it's Tara, not Tyler. I want to extend a warm welcome to both of you as this appears to be your first quarterly call, so welcome aboard.

Next question will be from Chris Shibutani of Goldman Sachs.

This is Steven on for Chris. Two for me. Had a question on increasing this field force. Can you just speak to the magnitude of the increase in the number of reps and then when we should expect to see an impact from this expansion? And then in terms of capital allocation priorities, as announced today that there's a shift to focus more on the ZORYVE launch and commercialization away from the pipeline. Just curious if we could see additional steps like this taken in the near term and kind of what that next level of reprioritization would look like.

Sure. I'll address the second part of that question, and then I'll pass the first part to Ken. The short answer is no. Currently, we've implemented the changes we plan to make. We have a lot happening at Arcutis and a broad pipeline, but it's essential to have the resources to successfully launch ZORYVE, as well as to tackle seb derm and AD. We believe it's responsible to reprioritize our approach to managing shareholder funds. This isn't a drastic cutback of the pipeline; we will continue advancing several programs. ARQ-255 is currently in the clinic, and we are moving forward with ARQ-234, the biologic we recently acquired. However, we have decided to pause some earlier stage programs, such as 256, the cream version of our JAK inhibitor, and other preclinical programs, to focus our resources on the areas with the highest impact. We are also reviewing our general and administrative costs and headcount growth to ensure that any expansions are prioritized effectively. I don't expect further changes or adjustments in the coming months based on our current plans. Ken, could you discuss the changes in the sales force and when we might start seeing the impact?

Sure. So Steven, how are you? I want to clarify that it's field-based, not field force. We have expanded our resources focused on field reimbursement, which is a common role in many companies. We're not looking to make a significant addition; we already have some team members in place and plan to add about 10 to 12 more to help. These individuals are not part of the sales team; their main goal is to partner with our pharmacy and channel. They may reach out to some key physicians to provide further education on processing prescriptions correctly. This is not an increase in sales representatives. We're maintaining our previous numbers, with a primary focus on field reimbursement. The team is gradually being put together and should be established soon. We have seen benefits in various regions where they are already making an impact. The results are quite rapid once someone is in place and resources are better utilized. We want to avoid having our field representatives spend time on this aspect, as their focus should be on promoting ZORYVE. This team is designed to support the field team's efforts moving forward and does not expand our sales presence.

Our next question comes from Louise Chen of Cantor.

So wanted to ask you what your go-to-market strategy is for seb derm if you get approval. How do you expect uptake to be relative to what you saw for psoriasis? And then my second question is, when do you think we could hear about a partnership for ped and primary care? Could it be this year, and could it be a global partnership?

Hi, Louise. I was just thinking today, I haven't talked to you in ages. So, nice to hear your voice. Again, I think maybe I'll take your second question, then I'll throw it back over to Ken for the first question and Patrick's thoughts as well. In terms of the timing of a primary care partnership, I think it's always difficult to predict when a negotiation could be concluded. We haven't initiated anything yet. I think what we've said in the past, and we continue to believe this, is that we need to have the primary care partnership in place at least around the atopic dermatitis, at latest around the atopic dermatitis launch, just given the size of the atopic dermatitis opportunity outside of dermatology. It's about 60% of the market. It's certainly to be a meaningful contributor to seb derm as well. So we may end up concluding an agreement prior to atopic dermatitis, but a lot of that's going to depend on discussions with a potential partner as well. And then, Ken, do you want to talk about the go-to-market and uptake? And Patrick, you may have some thoughts too, from a clinical perspective.

Yes, absolutely. So seborrheic dermatitis is a disease where there hasn't been, as we mentioned, a new product launched in decades. And so I think we are really focused on the medical side on disease state education and kind of clarifying especially what the burden of disease is on patients. In some of the research that we've done, we've been able to show that patients that are on five or more treatments and often taking up 30 minutes of their day each day managing their seborrheic dermatitis. And those number of treatments are both over-the-counter as well as prescribed. So I think a lot of this information is something that because it hasn't been a part of the conversation, healthcare providers may not be aware of. So we have a lot of work that we're doing with regard to education. That being said, we know from the patient perspective that there is a very strong desire for new treatments. We can hear that clearly when we go out and talk to patients. And we also sense a lot of frustration on the healthcare provider side on the lack of kind of new modalities to be able to offer patients. So we are doing our diligence with regard to disease state education, but it's to a very receptive audience.

Yes. To add to that, I expect seb derm to be quite different compared to psoriasis. The level of unmet need, anticipation, and familiarity that we can leverage for both our company and the experience with psoriasis will shape our approach to entering that market. We believe that competition will be less intense and the market won't be as crowded, which, alongside high anticipation, will create a different scenario. As I mentioned earlier regarding access, we will launch into a situation where we already have some early coverage due to the transition of current coverage to the new indication or line extension. This should provide a significant advantage since we won't be starting completely from scratch concerning access, familiarity, or comfort with the mechanism or the product. We will employ some similar strategies, particularly in terms of sampling the product, which is a key expectation in dermatology offices. While people are generally familiar with foam products, ours differs in the quality of the vehicle, so we'll ensure that healthcare providers are oriented with it and provide samples like we would with any product launch. However, this launch will have its unique aspects, and I wouldn't anticipate the dynamics to be exactly the same, especially in the early stages compared to psoriasis.

And our next question comes from Greg Fraser, Truist Securities.

I want to follow up on the field-based expansion. I understand it's not about the representatives, but should we anticipate an increase in SG&A spending in the upcoming quarters, or might SG&A spending decrease? You mentioned slowing some of the G&A growth. Also, could you provide an update on the challenges with the coverage implementation? I apologize for bringing this up again since I know you've discussed it, but could you clarify how the issues are manifesting in the office compared to the pharmacy? With your current coverage, prior authorizations are generally not required, but some of the situations you described, like the doctor confirming the indication, seem similar to prior authorization steps. I want to better understand why NRS is not primarily affected by these issues. Is it typically in the pharmacy when the copay does not align with the coverage? Any additional insights would be appreciated.

Sure. Thanks for the question, Greg. Yes, on SG&A, we would still expect it to go up modestly sequentially as we continue to invest in the launch. I think this supplemental field team is one driver. We're continuing to add tactics. And then in addition to psoriasis, we have to prepare for the seb derm and atopic dermatitis launches. So we've been consistently saying that even with the reprioritization and reducing expense growth in certain areas of SG&A, the overall commercial investment, we want to keep robust to make sure that we have the resources we need for the launch. So SG&A I think will still modestly grow sequentially in support of those launches.

In terms of the office and pharmacy dynamic, I can provide some insights, although it's mostly anecdotal since we haven't quantitatively measured this. I would estimate a 60/40 split regarding where I perceive the challenges exist. Both challenges can be addressed but require different approaches. The office aspect focuses on education and ensuring accurate information entry. While a prior authorization is typically a formal process requiring more detailed information, what we have is more of a confirmation related to ICD-10, making the process slightly easier. This confirmation is necessary to activate any available coverage. For products requiring a hard prior authorization where additional justification is needed, we aren't encountering that issue with our current coverage. So, I stand by the 60/40 ratio. On the pharmacy side, our reimbursement specialists are actively engaging with pharmacies to educate them about our coverage in specific plans and encourage them to follow the covered route to obtain necessary information from the office. Although I don’t have specific data at hand, this reflects my current observations.

And our next question will come from Sean Kim with Jones Trading.

So I guess just the one question related to the recent approval in Canada. I'm curious to hear what marketing efforts you need to do in Canada, recognizing that it is a smaller market. Whether you'll lead the efforts by redeploying some with the commercial force into Canada or partner out for efforts. And whether the expected product sales in Canada will be net positive on the bottom line. And I guess, more broadly for the ex-U.S. opportunities, just curious if you have specific geographic areas that you're focusing on for the time being.

Yes, Sean. Thanks for the question. So I'll take part of this, and then I'll ask Ken to comment about the Canada launch plan. So from an ex-U.S. standpoint, Canada is the only geography that we plan to do ourselves outside the United States. And frankly, the U.S. and Canadian dermatology communities are so tightly interwoven that we felt that that was the right thing to do. Canada also has been a major contributor to the clinical development program for roflumilast. I think about one in three patients across all of our clinical studies came from Canada. And so there's a very high level of familiarity there with the topical roflumilast. Beyond Canada and the United States, we would be looking for a partnership for any other geographies. And we have said repeatedly in the past that our primary focus is on Japan and China and Asia more broadly. I think Scott mentioned in his comments, prepared comments that we've made significant headway on potential partnerships in Japan and China. And I think that that's something that could be something that could happen in the relatively near future. Beyond Japan and China, the only other really big market out there is Europe. And the challenge I think in Europe is reimbursement for topicals. You may be aware, Pfizer actually withdrew EUCRISA from the market last year for commercial reasons. Most European countries want to reimburse you at the rate of a topical generic steroid, which just is not a reasonable reimbursement rate. And so that creates some significant headwinds in Europe. And then I think beyond that, it would really depend on the appetite of a partner to take on other geographies. But that certainly is not one of our priorities right now, trying to find partners in Middle East, Latin America, places like that. So Ken, do you want to maybe talk a little bit about the Canada launch preparations?

Sure. To put Canada into perspective, it has about one-tenth the population of the U.S., which presents a smaller opportunity compared to the U.S. What's noteworthy about Canada is the compact nature of prescribers in dermatology. This means that our investment for commercialization in Canada is relatively modest, as we can utilize significant resources from our U.S. team for commercial health, including operations and marketing. Many of our functions, such as regulatory, are borrowed from the U.S. and built on our previous work. This creates an efficient approach, with a sales team of just seven people across the country. We're drawing heavily on our past experiences, whether it's tactics, learnings, or strategy. Moreover, there is a substantial unmet need in Canada, and expectations are even higher than anticipated. We expect strong support for this launch. Regarding sales, we are aware that pricing in Canada differs greatly from the U.S., and we will discuss launch terms in more detail later. However, we are optimistic that entering the Canadian market will be a positive step, and we also plan to pursue follow-on indications across our entire portfolio.

Okay. So we're a little over time, but I just want to take just a minute and wrap things up. I think, as I said at the beginning of my comments, if you look at the fundamental indicators of the business, we're very, very encouraged. Demand is growing very strongly. Very, very positive patient and physician feedback on the product profile. And we made great headway with coverage on the product as well, outpacing all of the other recent topical launches. I know a lot of the questions have come up around this gross-to-net question. I think it's the first time we've probably gone into great detail around gross-to-nets and some of the dynamics that we're seeing. I would point out a couple of things. The first one is topical dermatology from a reimbursement standpoint is different than any other sector of the pharmaceutical market, right? This is as different from orals and injectables as buy and bill is, in many respects. But the topics that we've discussed around our gross-to-net dynamics are not unique to Arcutis. In fact, you see this really with every topical company having very similar sorts of issues that they have to address. And I think the most important thing is that we have, I think, a good understanding of where we have run into challenges with gross-to-nets, and we have a solid plan on how we can implement and improve our gross-to-net. And we remain confident that we're going to see quarter-on-quarter improvements throughout the year. And as I mentioned before, we continue to believe that we're going to be able to achieve a very solid gross-to-net in the foreseeable future. So wanted just to clarify that a little bit and look forward to continuing to update you all on the progress we're making on gross-to-nets as well as on patient demand in subsequent calls. And with that, I think we're going to wrap up.

Thank you, everybody, for your participation in today's conference. This concludes the program, and you may now disconnect.