Arcutis Biotherapeutics, Inc. Q3 FY2024 Earnings Call

Good day, and welcome to the Arcutis Biotherapeutics 2024 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Now I'll pass the call to Latha Vairavan, Vice President, Finance and Investor Relations. Please go ahead.

Thank you, Carmen. Good afternoon, everyone, and thank you for joining us today to review our third quarter 2024 financial results and business update. Slides for today's call are available in the Investor section of the Arcutis website. On the call today, we have Frank Watanabe, President and CEO; Patrick Burnett, Chief Medical Officer; Todd Edwards, Chief Commercial Officer; and David Topper, Chief Financial Officer. I would like to remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that, let me hand the call over to Frank.

Thank you, Latha, and thank you to everyone for joining us today. With that, let me turn to Slide 5 of the deck. I'm pleased to report that we maintained our robust growth trajectory in the third quarter, and I'm constantly impressed by the entire Arcutis team and its exceptional execution. Our expanding ZORYVE portfolio now encompasses psoriasis, seborrheic dermatitis, and atopic dermatitis, providing physicians and their patients multiple forms of ZORYVE cream and ZORYVE foam to address their needs. ZORYVE is the first and only topical anti-inflammatory agent with indications for all three of these highly prevalent conditions, and physicians are becoming increasingly familiar with our product portfolio. ZORYVE portfolio sales grew 452% year-over-year and 45% quarter-over-quarter, reaching $44.8 million, which is remarkably strong, particularly following the impressive growth we've had in previous quarters. Furthermore, our third quarter revenue run rate is an encouraging sign for an excellent finish to 2024 and provides us with strong momentum going into 2025, continuing to demonstrate the significant opportunity for ZORYVE. From a volume demand perspective, TRxs for the ZORYVE portfolio grew 25% quarter-over-quarter. New prescription growth was also impressive, increasing 23% quarter-over-quarter. Also on this call, you will hear Todd discuss the ongoing gross-to-net improvements we are making, and I'm delighted that we are now in the low 50% range, a meaningful improvement from the high 50s last quarter. Our atopic dermatitis launch has been steadily gaining since the late July launch, and we're excited about the long-term potential of this additional indication and its expected contribution to the overall brand. Looking forward to the remainder of the year and into 2025, we believe we are well positioned to maintain strong revenue growth. Historically, many topicals have struggled to grow revenues or to sustain that growth long-term, but we are confident that ZORYVE is different. I would like to share with you all the reasons for our confidence in the long-term growth potential of ZORYVE. On Slide 6, we have already achieved impressive revenue growth with the ZORYVE family of products, driving both prescription growth and significant gross-to-net improvements. But we are just beginning, and I would point to four significant factors that are going to allow us to sustain the growth of ZORYVE and to redefine what can be achieved with a topical product. We are building out the ZORYVE product label with the expected approval of scalp and body psoriasis in the middle of 2025, as well as expanded indications for pediatric patients in atopic dermatitis and psoriasis. These new and expanded indications will further physicians' ability to rely on ZORYVE as their go-to first-line topical agent. Having successfully penetrated commercial payers, we are now working to make ZORYVE accessible to government pay patients across both Medicare and Medicaid, opening access to as many as 3.3 million incremental patients in dermatology offices, and Todd will update you on our progress thus far on this front. Securing access to the large government-insured population has been a priority for us from the start, and our progress here is clear validation of our pricing strategy. Our partners, Kowa, are now promoting ZORYVE to high-potential primary care doctors and pediatricians, and the early feedback has been very positive. The new and expanded indications and broader insurance coverage across commercial Medicare and Medicaid will amplify the impact of their promotional effort. We expect a meaningful contribution from this co-promotion beginning in 2025 and growing from there. Finally, there are approximately 16 million topical steroid prescriptions written by dermatologists for our approved indications each year, and we are just scratching the surface of penetrating this large segment. The first three elements I discussed will be foundational in shifting topical use away from steroids as we emphasize the safety of using ZORYVE for any duration and anywhere on the body, coupled with its strong efficacy. We are also increasingly hearing from the dermatology community their recognition of the need to reduce their reliance on steroids. So that will be another tailwind behind ZORYVE's growth. We are confident that we will drive this shift away from steroids over time. Turning to Slide 7 to spend just a few more minutes to help quantify the very large expansion in our target markets that I just mentioned. We keep highlighting the slide to provide a concrete sense of how significant this expansion is as well as how attainable it is. Up to this point, we have been primarily focused on the roughly 4.5 million commercially insured patients with our target indications being treated in the dermatology office. We are expanding our penetration of the psoriasis, seborrheic dermatitis, and atopic dermatitis patient segments and continue to take share from other topical agents. As Todd will discuss in a bit more detail in just a minute, we are very proud that ZORYVE is now the number one branded topical anti-inflammatory agent for new prescriptions, and we anticipate taking the number one spot for total prescriptions very shortly. Our dramatic growth in market share in the branded topical space is a testament to physician preference for ZORYVE, driven by our rapid reliable efficacy, our strong safety and tolerability profile, the patient-friendly once-a-day formulation, and our broad and ever-increasing insurance coverage. As we gain Medicare and Medicaid coverage, we will be able to expand ZORYVE usage to the more than 3 million dermatologists-treated psoriasis, atopic dermatitis, and seborrheic dermatitis patients with government insurance. In addition, our new co-promotional partner, Kowa, is allowing us to simultaneously expand into the more than 7 million commercially and government-insured patients treated for their psoriasis, seborrheic dermatitis, or atopic dermatitis outside of the dermatology office. A very large percentage of all of these patient segments are currently treated with topical steroids, and momentum is growing in the shift away from topical steroids, although this has really only just begun. ZORYVE is the perfect replacement for topical steroids, offering physicians and patients robust efficacy, the ability to be used anywhere, tolerability that allows chronic use unlike steroids, and broad insurance coverage. Todd will further expand on this in just a few minutes. This immense market size and the continued expansion of the market segments where we are competing are what make us so optimistic about the blockbuster potential of ZORYVE. I did want to take just a moment to also touch on an important governance announcement we made this morning. Our Board of Directors has appointed Keith Leonard as the Chair of our Board effective this Monday. I'm delighted to have Keith taking over the leadership of our Board. We've worked together closely for many years across several companies, and he has been on our Board for the past three years. He possesses an incredible level of Board and operational experience and commercial acumen, which will be invaluable to us as we continue to drive the growth of the ZORYVE franchise. So congratulations to Keith. I also want to sincerely thank Patrick Heron, our previous Chair, for everything he has done for Arcutis and for me personally. Patrick has been with us from the very beginning and has been our Chair since 2018, guiding us through our IPO, our commercial launch, and so many other significant milestones. Equally important, he has been and I'm sure he will continue to be a fantastic mentor and coach to me. And I couldn't be happier that Patrick has agreed to stay on the Board as one of our independent directors. With that, let me turn it over to Todd to provide some further commentary around ZORYVE cream and foam launches in psoriasis, seborrheic dermatitis, and atopic dermatitis.

Thank you, Frank. We are very excited about the growth and expansion of our product lineup, the positive response from healthcare providers and patients, and the significant opportunities ahead. This quarter, we achieved $44.8 million in net product revenue for ZORYVE for the third quarter of 2024, marking a 45% increase over the second quarter and continuing our trend of strong growth each quarter this year. We have consistently delivered more than 40% quarter-over-quarter revenue growth since Q1 of 2023. This impressive growth was fueled by increased prescriptions across ZORYVE products and improvements in our gross-to-net percentages, now in the low 50s. The prescription growth was significantly driven by the strong take-up of the foam formulation, advancements in launching the 0.15% cream for atopic dermatitis, and the subsequent growth effects impacting the 0.3% cream for psoriasis. We anticipate a strong conclusion to 2024, which will help us start 2025 steadily. This positioning is crucial as we typically see a slowdown in the first quarter due to patients adjusting to deductible resets and switching health insurance, which leads to prescription refills being pushed into December. Consequently, in Q1, we experience dampening in both gross-to-net and volume. Moving to the next slide, ZORYVE prescription volume has reached an all-time high of 11,000 scripts over a rolling four-week period. This reflects a 25% increase from Q2 and a remarkable 280% compared to last year. The graph shows clear growth inflections for the launches of ZORYVE foam for seborrheic dermatitis and the 0.15% cream for atopic dermatitis. Regarding our recent launch for atopic dermatitis, we are very pleased with its performance and continue to see strong momentum. As anticipated, this launch has outperformed the psoriasis launch, proving to be successful three months in, with new prescription counts significantly higher than psoriasis each week since launch, and we have received very positive feedback from both providers and physicians. On the next slide, I want to highlight the evolution of our gross-to-net, which is tied to our strong coverage from all three major pharmacy benefit managers and progress in formulary access and downstream plans. We have consistently shown our ability to secure covered prescriptions, with around 80% of ZORYVE 0.3% cream prescriptions being covered. For ZORYVE foam, we've seen improvements, reaching 75% coverage in less than three quarters since launch. For atopic dermatitis, only months into the launch, we have already achieved 60% coverage—an impressive rate for a launch. The chart shows our blended gross-to-net improvements, progressing from last year when only the 0.3% cream was available, with gross-to-net percentages in the low to high 60s. We have further improved this even with the launch of seborrheic dermatitis, now recording low to high 50s across all indications—typical behavior as we expand indications that enhance overall franchise profitability. Our gross-to-net is approaching a steady state, and while we may see some quarterly variability, we expect it to remain in the 50s. We anticipate a seasonal regression in gross-to-net in the first quarter of 2025. At Arcutis, we remain focused on increasing prescription demand and paid prescriptions as we aim to build a profitable business. We are pleased with our achievements in commercial insurance coverage and are eager to advance our government insurance coverage as well. I am happy to report that since our last update, we have secured Medicaid coverage in California, Arizona, Michigan, and Indiana, adding to our previously announced achievements in Florida, Texas, and New York. We now have Medicaid coverage across states representing about 40% of the U.S. population and expect to secure more states soon. The quality of this Medicaid coverage is strong, and we are also making progress in negotiating with Medicare Part B programs. These victories with government payers confirm our unique approach to pricing and will propel our future growth. The next slide illustrates the new prescription market share in the branded topical space, which is a key indicator for future brand growth. The family of ZORYVE products now leads all other branded topical treatments in terms of rolling four-week new prescriptions. As Frank mentioned, we are very close to taking the number one spot for total prescriptions as well. While this progress is thrilling for our portfolio, the biggest opportunity lies in transitioning patients from topical steroids. The next slide shows that the majority of prescriptions are still for topical steroids among the dermatology clinicians covering our three targeted indications. Out of 22 million topical prescriptions written in the last four quarters, roughly 16 million were topical steroids, while just over 1 million were for branded non-steroidal topicals, underscoring the vast growth potential as clinicians shift from steroids to newer topical agents. Facilitating this transition from topical steroids to the ZORYVE portfolio will be vital for our future growth. Moving to the final slide, with the recent FDA approval in atopic dermatitis and the availability of three distinct products, we are establishing a comprehensive portfolio of ZORYVE solutions for clinicians addressing multiple approved indications, which will support future brand expansion. The advantages of the ZORYVE product lineup, which targets three common dermatological conditions where topical steroids are the current standard of care, are unprecedented and create treatment simplicity for both prescribers and patient management. The key clinical attributes of ZORYVE across these indications, including its dependable efficacy, quick relief from itching, once-daily formulation suitable for application anywhere on the body, and a straightforward prescription fulfillment process, will encourage preference for ZORYVE among both dermatologists and primary care providers. We are systematically building our brand and are on the path to becoming the top topical brand in dermatology. Now let me hand it over to Patrick.

Thank you, Todd. I'm on Slide 16. I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast to the dermatology community in the clinic and continuing to hit all of our timelines regarding regulatory milestones. We were just at the Fall Clinical Dermatology Conference and received a lot of great feedback about ZORYVE cream for atopic dermatitis. HCP excitement is growing as providers build their own clinical experience with ZORYVE and atopic dermatitis, and confirm that the product profile is a good fit for what they and their atopic dermatitis patients are looking for. So keeping with atopic dermatitis, we're looking forward to the submission of our sNDA for the treatment of mild to moderate atopic dermatitis in two to five-year-olds, which is planned for quarter one of 2025. We continue to generate additional data that should ultimately support expanding the psoriasis indication down to the age of two. For foam, we have a PDUFA date approaching in May for scalp and body psoriasis. If approved, this will represent our fourth indication for ZORYVE. In a moment, I want to share some of our patient responses and data, so you can see why we're so excited to bring this indication to patients. Finally, we're progressing our pipeline. Coming up in 2025, we expect to file the IND for ARQ-234, our biologic CD200 receptor agonist for atopic dermatitis. We have a Phase 1b readout in the first half of 2025 for ARQ-255, which is our topical JAK in alopecia areata. Now coming back to ZORYVE foam on Slide 17, our next new therapeutic focus is leveraging the properties of ZORYVE foam to help patients with scalp and body psoriasis. Almost half the plaque psoriasis patients suffer from scalp involvement, but this number doesn't capture the impact of scalp disease on quality of life and the challenges of treating it with products that are not fit for purpose. To provide more insight into how scalp psoriasis impacts patients, I'm going to briefly review some of the itch data from ARRECTOR, our pivotal Phase 3 trial of ZORYVE foam in scalp and body plaque psoriasis. We enrolled patients with at least moderate severity of the scalp and mild, moderate, or severe disease of the body. 452 patients were randomized 2:1 to receive ZORYVE or vehicle foam over an eight-week dosing period. We measured two co-primary endpoints of scalp Investigator Global Assessment or S-IGA success and body Investigator Global Assessment or B-IGA success at week eight. In addition, we assess itch using two 10-point numeric rating scales, the SI-NRS, or Scalp Itch Numeric Rating Scale, and the Worst Itch or WI-NRS, which is a traditional assessment of itch that covers the entire body. Remember, itch is a symptom that primarily drives the impact on quality of life and is identified by patients as the number one disease characteristic that determines the severity of their psoriasis. On the left side of this slide, we have scalp itch data from week eight, showing that over 50% of patients achieved an SI-NRS score of 0 or 1. Similar results can be seen for WI-NRS, where 55% of patients achieved a 0 or 1 compared to just about 20% of vehicle-treated patients. This type of NRS 0 or 1 analysis is recommended by itch experts because it doesn't just capture a clinical improvement in itch but goes a step further into a range where itch as a symptom is completely controlled, and the burden of the symptom is eliminated. ZORYVE showed statistically significant improvement in itch within 24 hours of the first application, a very important benefit for patients suffering from the unrelenting itch of scalp psoriasis. Not shown here, but the incidence of adverse events was low and generally similar between active treatment and vehicle across both our Phase 3 and Phase 2b studies. Overall, the most common adverse events included headache, diarrhea, nausea, and nasopharyngitis. Moving on to Slide 18. I want to share photos from two patients and their progress over the eight weeks of our Phase 3 ARRECTOR trial. Both patients had severe disease coming into the study with scalp IGA of 4 on the 5-point IGA scale, which goes from 0 to 4. You can appreciate the erythematous or red plaques in their scalp with the characteristic thick white scale that we commonly see in scalp psoriasis. In both patients, you can see rapid improvement in the scalp plaques after two weeks, accompanied by a reduction in itch by 50% or more in both patients. By week eight, both were considered treatment successes, having achieved an IGA of 1, which means almost clear. Importantly, you can also see that based on their SI-NRS, these two patients came into the study with a scalp itch of eight and nine out of 10, respectively. In addition to the clinical improvement, these patients also experienced an itch score of zero by week eight, indicating complete resolution of their itch. One of the major challenges for managing psoriasis patients with scalp disease is the complexity of traditional treatment regimens. Often, they end up with several prescriptions for their scalp and at least one or more for the body. One of the consistent themes about ZORYVE profile is that it simplifies treatment for the patient, and ZORYVE foam for psoriasis is a perfect example of that. We designed the pivotal trials to highlight this benefit through the co-primary endpoints for scalp and body IGA that I mentioned. ZORYVE foam can be used once a day on any area of the body where psoriasis occurs, including hair-bearing areas such as the scalp where creams, lotions, or ointments are suboptimal, making the foam an effective treatment for scalp and body psoriasis. And with that, I'll pass it over to David.

Thanks, Patrick. I'm on Slide 20, showing financial results, both year-over-year and quarter-over-quarter. As you've heard, we generated net product revenues in the quarter of approximately $45 million, which is up 452% from Q3 of 2023 and 45% from Q2 of this year. This persistent strong growth reflects our continued success in gaining share of the very large addressable market for all three of our approved indications, and we certainly believe this growth is still in its infancy. For the third quarter, our R&D expenses were $19.5 million, which is down 26% from $26.2 million in the third quarter of 2023 due to decreases in the development costs of topical roflumilast programs and relatively flat compared to the second quarter of this year. Please keep in mind that a large portion of the expenses included in the R&D line item is comprised of medical affairs activities supporting ZORYVE commercialization and manufacturing costs for pipeline candidates. SG&A expenses were $58.8 million for the third quarter of 2024 versus $47.6 million in the same period last year, as we invested in both our current and future launches, including the expansion of our field force in late Q2. That total was more or less flat to last quarter, with G&A coming down by approximately $2 million as we found expense savings, while commercial costs increased by a little under $3 million, which is to be expected as we experienced robust sales growth. We still believe that we are investing appropriately in the tremendous growth potential of the ZORYVE portfolio while constantly looking for ways to achieve savings and efficiencies. For the fourth quarter, excluding the commission to Kowa, we expect total expenses to remain roughly in line with Q3. The Kowa commission will be included on the SG&A line, and to the extent that our partners are able to drive sales growth in primary care and pediatrics, this will lead to a commensurate increase in SG&A. I'd like to remind everyone that we only pay commissions to Kowa when they generate scripts and revenues. Those revenues are immediately accretive, given there are no meaningful fixed costs for Arcutis associated with this partnership. On Slide 21, you can see we had cash and marketable securities of $331 million on our balance sheet as of September 30, which translates to a cash burn from operations in the quarter of $35 million. Our cash burn for the quarter was meaningfully lower than Q2, dropping by more than 23% quarter-over-quarter, and we would expect our quarterly cash burn to continue trending downward as our revenues grow. We told you last quarter that we had renegotiated our debt agreement to improve the terms, including adding the ability to repay up to half of the $200 million beginning in the fourth quarter of this year. While not reflected in the third quarter balance sheet, we did subsequently repay $100 million of the debt facility, which will significantly lower our interest expense. I would remind you that we have the option to redraw that $100 million in whole or in part at our discretion through the middle of 2026, giving us great flexibility to manage our available cash resources. We believe our current capital, together with available debt, our growing product revenues, and improved economies of scale will enable us to reach our breakeven point in 2026 and operate the business for the foreseeable future while appropriately investing in our commercial launches and pipeline. Therefore, we anticipate no need to return to the equity market to support our existing businesses, as we've stated before. With that, I'll hand back to Frank for some closing comments, and then we'll open for Q&A.

Thanks, David. Our goal is to make a positive and meaningful impact on the lives of people afflicted with chronic dermatologic diseases. With ZORYVE now launched in three indications, we are proud to be helping millions of medical dermatology patients while building shareholder value. We are confident that our strong performance in Q3 '24 portends strong and sustained growth for the rest of '24 and strong momentum going into 2025. And with that, we'll open it up to Q&A.

Thank you so much. One moment for our first question. It's from Vikram Purohit with Morgan Stanley. Please proceed.

Vikram?

Hi, good evening. Thanks for taking my questions. So we had two, one on the primary care partnership with Kowa and then one on the pipeline. So, Frank, I think you mentioned that you expect to see a contribution there starting in 2025. Just curious what you would expect the cadence of that contribution to be and how you think it might trend throughout the course of next year? And then secondly, for the alopecia areata readout expected in the first half of next year, just curious to see how you guide us to interpret that dataset and what you're looking to establish to keep moving that program forward? Thanks.

Sure. Thanks, Vikram. Todd, do you want to maybe take the primary care partnership question and then Patrick, you can address 255?

Yes. In reference to the Kowa co-promotion, first, let me just say that, as mentioned, that Kowa has been actively promoting since September in both the primary care and pediatric specialties, and that has been very well received. They continue to engage with those specialties. But you've got to remember that within primary care and within the pediatric market with a branded topical like ZORYVE, it's a little bit of a longer selling cycle. Not only are they introducing a new brand, but a new non-steroidal with some new processes and such. Although there’s a great reception of Kowa promoting the product and getting great feedback relative to the recognition of the differentiation of the asset of ZORYVE across all three indications, it will take some time to ramp up. As we mentioned earlier, we are expecting a meaningful contribution in 2025, but at this time, we're not providing guidance on what that contribution will look like next year.

I can provide an update on 255. This relates to a Phase 1b study in alopecia areata, which primarily focuses on safety and biomarker assessment, while also incorporating some clinical endpoints. The treatment duration is brief at three months. Our main goals are to confirm that the drug is safe and well-tolerated for topical use on the scalp, which we anticipate, and to gather initial efficacy data that would support success in a subsequent clinical trial with a longer treatment duration.

Got it. Thank you.

Thank you so much. One moment for our next question. And it's from the line of Seamus Fernandez of Guggenheim Securities. Please proceed.

Great. Thanks so much for the question. So congrats on the quarter. Obviously, a very impressive result. Can you guys help us with a couple of things? First, was there any stocking in the quarter that contributed to the impressive result? Just based on our math and the low 50s number, we would have gotten a very, very modest stocking contribution, maybe less than a couple of million, but just wanted to know if there's any clarity on that? And then second, as we look forward to the sort of coverage dynamics in 2025, can you just help us understand, I believe, the timing of coverage dynamics outside of Medicaid, but more along the lines of Medicare and treatment opportunity in seborrheic dermatitis? Can you help us understand how that will come on and how the launch will progress in that potential patient population? The reason that I ask is because with the $2,000 limit within Part D, that seems like a very robust opportunity for the company to market towards. Thanks.

Yes, sure. Thanks, Seamus. Yes, David, you want to take the stocking question? And then Todd, I'm going to throw it back to you on the question around coverage in '25.

I think Todd will take the stocking question. I'll comment.

We did not observe any stocking related to the actual gross-to-net. I'm pleased to report an improvement in gross-to-net in Q3, primarily due to the team's efforts in converting a higher percentage of prescriptions to paid ones. Additionally, they successfully established a reliable and efficient prior authorization and fulfillment process, which helped dermatology offices increase those paid prescriptions. There was also a decline in patient deductibles and co-pays as the year progressed, leading to a quarter-over-quarter improvement in gross-to-net across all indications. PsO remained steady in the 50s, as discussed in the previous quarter. Foam and seborrheic dermatitis reached the 50s this quarter, earlier than expected. We are seeing ongoing improvements in the gross-to-net for atopic dermatitis. Regarding your question about Medicare Part D, we are having positive conversations with payers. However, the Inflation Reduction Act has introduced changes affecting pharmacy benefit managers, which are creating operational challenges as they prepare for mandated changes effective January 1, 2025. While our discussions are positive, they have delayed our ability to secure coverage for 2024, but we do expect coverage for 2025, which will benefit atopic dermatitis, psoriasis, and seborrheic dermatitis.

Great. Thank you.

Our next question is from Uy Ear with Mizuho. Please proceed.

Hey guys. Yes, thanks for taking the questions. And congratulations on the quarter. So maybe the first question on gross-to-net. With Kowa coming online and you guys going into the primary care, just wondering how does that perhaps impact the gross-to-net going forward? You guys indicated that you're also expecting seborrheic dermatitis to kind of reach steady state by the end of the fourth quarter. So yes, just wondering what the impact on gross-to-net would be with Kowa?

Yes. Todd?

Yes. Thank you, Frank, and good question. So we don't anticipate Kowa's promotion and primary care piece to impact our gross-to-net. It's the same payer coverage, the same fulfillment prescription process as it is in dermatology. Given that's very consistent, we don't anticipate any adverse impact relative to gross-to-net coming out of Kowa's promotion in those two specialties.

Thank you. So you expect pretty much most of the prescriptions to go through your specialty pharmacies and not to retail. Is that the case where you have a trade-in program versus sort of reimbursing at the retail centers or pharmacies?

Yes, exactly why it's a good question, is that Kowa is leveraging our pharmacy network that we have established for dermatology. We've got a number of derm specialty pharmacies that are working with those derm specialty pharmacies, since this is a re-prescription. They'll receive that from Kowa, whether it comes from pediatrics or primary care. So it'll be very consistent in how those prescriptions are fulfilled in dermatology as they are in primary care or pediatrics.

Okay. And second question is with Lilly expecting to complete their CD200R agonist in mid-2025, you yourself have won ARQ-234. I guess like what would you want to see from the Lilly data? And based on what you see, how would you kind of perhaps reprioritize or change the way that you're thinking about moving this particular asset forward?

Sure. Patrick?

Yes, absolutely. Thank you for the question, Uy. From the Lilly readout, we would like to see continued support for the efficacy already demonstrated in atopic dermatitis with the CD200R agonist mechanism of action. Any validation within that mechanism would be very beneficial for us. While we can't read too much into the specific numbers, we believe that we can differentiate ourselves effectively from that Lilly compound. We are confident about producing strong differentiation data as we advance toward our initial clinical trials and beyond. Our objective, as with all of our programs, is to progress them as quickly as possible. Therefore, the more enthusiasm there is around CD200R, the better it is for us.

Okay. If I can ask a third question. Maybe could you help us quantify the impact from Hurricanes Helene and Milton, if possible? Thanks.

Sure. Todd?

Yes. Good question, Uy. And relative to the hurricanes, we saw some nominal impact directly within those affected areas. But probably as you've noticed, our volume for quarter-over-quarter has obviously been strong. With ZORYVE foam, we have 53% quarter-over-quarter growth, which we're very delighted with. So although some impact from the hurricane, we were quickly able to recover from that and continue to see strong demand performance across all three of the indications.

Okay. Thank you.

Thank you. Our next question is from the line of Serge Belanger with Needham. Please proceed.

Hi, good afternoon. And congrats on the solid quarter. A couple of questions from us. The first one, I guess for Todd, a follow-up on a prior question regarding Medicare coverage. Can you tell us what proportion of the ZORYVE Medicare Part D total addressable market do you expect to have coverage for in 2025? Just trying to get an idea of if this is a multi-year project to get full Medicare Part D coverage.

Yes, I'll be happy to answer that. So relative to the Part D coverage in 2025, when we contract with the PBM managing the Part D benefit, when we contract with them, we'll contract for their portfolio, their book of business of the Part D benefit. So we will be able to, once we contract, pick that up fairly instantly, which we anticipate to be able to secure Medicare Part D within 2025. Did that answer your question?

Yes. I mean, I guess how much of the Medicare Part D total addressable market will that initial coverage for 2025 cover? Is it the entire Medicare Part D business for ZORYVE or just a portion of it initially?

It will be initially a proportion of it, initially. And it's just difficult to tell you exactly what specific percent that is of the total Part D volume. But I anticipate picking up the majority of the Part D impact to their different books of business. As we roll on, we'll pick up additional coverage. One thing you can think about is relative to the indications, if you think about psoriasis, it's more commercial insurance-oriented. About 70% of that is commercial. But when you cut across seborrheic dermatitis and atopic dermatitis, it's closer to a 50-50 split between the commercial business and the government business. So within that framework, we will start to pick up the benefits in 2025 and then have opportunities after that to pick up any coverage that we didn't initially.

Serge, if I could just add, it's essential to remember that Medicare Part D resembles the commercial business. There are various insurance plans managing different segments of the Part D population, and within those plans, there are diverse books of business. When we enter contracts, we may secure one plan or one book of business with a particular plan, while there might be delays with others. This leads to a somewhat inconsistent pattern, similar to the commercial sector, where you might gain a little upfront and then gradually increase over time. You should anticipate something quite similar with Medicare. It's not as straightforward as one might assume, given how fragmented the management of the Part D benefit has become.

Okay. Got it. And then from a competitor environment standpoint, just curious if you expect changes now that your direct competitor has changed hands and has had a bit of a delay for their atopic dermatitis approval?

Well, I think it still remains to be seen how the transition of topical tapinarof from one company into another changes the marketplace. Certainly, the delay in the PDUFA action date for tapinarof in atopic dermatitis is a very positive development for us. It just gives us more headway to continue to build our brand, although I think as Todd showed you guys on the slide, I don't really see that as our primary competition. I think first and foremost, steroids are our main competition. And then in the branded atopic dermatitis space, obviously, Opzelura is an important competitor as well. But I think it's still too early to tell what the impact of the change in ownership of tapinarof is going to have.

Okay. Thank you.

Thank you. One moment for our next question. And it's from Kambiz Yazdi with Jefferies. Please proceed.

Hey team. Thanks for the opportunity to ask questions. I guess the first one is what proportion of the Q3 sales are attributable to the Kowa deal? And can you remind us how long Kowa will prioritize ZORYVE and kind of what doctors you'll be focusing on? And then I have some follow-ups.

Yes.

I think you can go ahead.

No, I think we heard your question correctly. The results from Kowa in the third quarter were essentially immaterial. They got started kind of mid-September. And so we haven't seen anything material yet.

Yes. And then, Kambiz, in terms of the other questions, the agreement is a five-year agreement, and the deal is structured in such a way that ZORYVE has to be one of the priority products in their portfolio throughout the five-year period.

Great. And then maybe just a couple of follow-ups for me more on the government payer side. What's kind of the blend of commercial versus government payer contribution to your Q3 revenue? And then as a last question, can you remind us how your pricing strategy was informed? And has it enabled faster negotiation with payers than, say, other branded topicals? Thank you.

So maybe I'll take the pricing one and then, Todd, you can touch on contribution from Medicare and Medicaid. So our strategy from the outset was to try and optimize our access to the Medicare and Medicaid populations. It's a very significant percentage of our target populations, roughly about half of the patients with the diseases we're currently treating. One of the keys in our mind was to try and avoid being placed in the specialty tier with Medicare. That was one of the key variables as we set the price for ZORYVE. While we haven't received Medicare coverage yet, I think the very rapid progress we made on the commercial front and the very rapid progress we're making now on the Medicaid front validate that we took the right approach in setting the ZORYVE price so that we can maximize that access. As Todd said, we are very confident in our ability to secure very good Medicare coverage as well as '25 progresses. Todd, can you maybe comment on what we're seeing in terms of contribution from Medicare and Medicaid?

Yes, absolutely, Frank. So what we're seeing today was, I'll say, within Q3, as far as the net revenue, it was primarily driven by commercial. As we mentioned in the Q2 earnings call, we did pick up some Medicaid. I mentioned Florida, Texas, and New York. There is some uptake in volume there. But for Q3, it was primarily the commercial business. The states that we picked up in Medicaid, the ones we mentioned on this earnings call, those are all future opportunities for us, and we plan to drive incremental growth. Those are great growth opportunities for us. As mentioned, we plan to pick up more Medicaid states as we roll forward.

Thank you so much.

Thank you. And as I see no further questions in the queue, I will turn it back to management for final remarks.

I'll just keep it short and sweet. Thanks to everyone for joining us, and we look forward to talking to you all next quarter. Thank you.

And thank you all for participating in today's conference. You may now disconnect.