Arcutis Biotherapeutics, Inc. Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics 2025 Second Quarter Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Frank Watanabe, President and CEO. Please go ahead.

Thanks, Brian, and thank you to everyone for joining us today. I'm pleased to report that in the second quarter, we continued to see strong sales and demand growth with our ZORYVE franchise, demonstrating continued adoption by healthcare providers and patients and consistent execution by our commercial team. During today's call, we will review in detail the results for the quarter, but we'll also spend time talking in more depth about our plans to sustain our growth into the future, including the next wave of growth for ZORYVE, how we intend to leverage our best-in-class development and commercialization capabilities to address the unmet urgent needs of patients living with immune-mediated dermatologic diseases and our capital allocation framework to enable this next growth phase. Before I dive in, I want to thank the exceptional team at Arcutis that is dedicated to and instrumental in advancing our efforts to serve the needs of people living with serious skin diseases. So on Slide 5, honing in on the second quarter, we saw another quarter of strong revenue growth as patients and clinicians continue to adopt ZORYVE for the treatment of a range of inflammatory dermatosis. For the quarter, we reported net product revenues of $81.5 million, representing 28% quarter-on-quarter growth and 164% growth compared to the same quarter in 2024. This substantial sequential growth reflects the continuously increasing demand for ZORYVE with TRx volume increasing for all products. In May, we received approval from the FDA for the use of ZORYVE foam 0.3% for the treatment of plaque psoriasis of the scalp and body, our fifth FDA approval for ZORYVE in the last three years. We believe this new indication for our foam will provide an important and much-needed new treatment option for the over half of plaque psoriasis patients who have scalp involvement. In the quarter, we continued to make progress against a core objective that is the progressive conversion of topical steroid prescriptions to ZORYVE. We see growing evidence that dermatology clinicians are appreciating the risks associated with extended steroid use and as such, are increasing their use of alternative nonsteroid topical agents. We also saw strengthening in our business fundamentals in the second quarter. As we continue to grow ZORYVE sales while remaining disciplined with our expense base, we are increasing our operating leverage. Latha will go into more detail on our operating results and improving cash burn profile. As we progress towards reaching cash flow breakeven in 2026, we are rapidly approaching a point where we will have additional resources to invest in future growth. And today, we will begin to lay out our plans, including the next wave of ZORYVE expansion, additional pipeline opportunities, and our disciplined capital allocation strategy that underpins it all. Okay. Turning now to Slide 6, we have been intently focused on clinical, regulatory, and commercial execution for ZORYVE over the last several years as evidenced by our results. And so as I introduce our framework for near, medium and long-term growth today, I will start by saying that we will continue to see substantial opportunities for sales and profit expansion from our current ZORYVE indications and those in late-stage development. While nonsteroidal topicals are making inroads in the treatment of immune-mediated inflammatory skin diseases, there is still a tremendous amount of potential conversion to be had. As patients and prescribers continue to understand how ZORYVE can serve as the foundational long-term therapy for psoriasis, atopic dermatitis, and seborrheic dermatitis, topical steroids will increasingly be reserved for acute treatment. To dimensionalize the size of this opportunity, last year, over 69% of all topical prescriptions in our approved indications were written for steroids. So the progressive conversion from steroids will be a sustainable growth driver for ZORYVE for many years to come. Our expected label expansion for pediatric atopic dermatitis and development efforts for infant AD, which Patrick will further detail shortly, will be another component of this continued growth. Other commercial opportunities such as further access improvements and the development of the PCP and pediatric channel that we previously detailed will also support our continued momentum with ZORYVE. These cumulative near-term opportunities will power ZORYVE growth throughout 2025, 2026, and beyond. Beyond our current ZORYVE portfolio, we see a next wave of growth being driven by effective and efficient life cycle management for the ZORYVE franchise. This has been enabled by the various formulations and concentrations available for ZORYVE, which has, in essence, created a Swiss Army knife for inflammatory skin conditions. Patrick will expand on our approach to ZORYVE life cycle management, but I will highlight that a core principle is to be data-driven and disciplined, matching investment to clinical promise and opportunity size. Longer term, our current development pipeline shows promise in addressing areas of high unmet needs for these patients. We will also continue to evaluate external sources of innovation based on our conviction that our core competencies give us the ability to leverage the research and early development efforts of other companies and to drive those innovations through later stages of development, regulatory approval, and commercialization. We are at an exciting point at Arcutis, approaching profitability that will underwrite both the next stage of expansion for the ZORYVE franchise and subsequent waves of innovation. And while we are eager to apply our expertise in dermatological development and commercialization, I will again underscore that we will continue to be thoughtful and disciplined in our deployment of capital. We will continue to be stringent in our internal capital allocation by being data-driven in our pipeline management decisions. As you will hear from Patrick shortly in that vein, we have made the difficult decision to halt the development of ARQ-255 following the readout from our Phase Ib trial. Finally, in the context of these promising opportunities for capital deployment, I will reaffirm that we are committed to generating positive free cash flow. We remain on track to achieve this milestone with our current business in 2026. It is our intention that future clinical development spend to advance our existing pipeline will be funded by cash flows from our ZORYVE franchise, although we do acknowledge that a potential acquisition of some external innovation might require incremental capital.

Thank you, Frank. I'm on Slide 9. In the second quarter, we achieved $81.5 million in net product revenue for ZORYVE, reflecting 164% growth year-over-year and sequential growth of 28% compared to the first quarter. Importantly, growth during this period was driven by increased demand across all strengths and indications, highlighting the robust performance of the franchise and the continued adoption of ZORYVE across its approved indications. The meaningful revenue expansion in the quarter was a result of strong volume growth supported by stable gross to net rates for ZORYVE, driven by the high percentage of prescriptions being reimbursed. An additional factor driving product revenue growth in the quarter was the recovery of inventory levels in our distribution channels back to normal levels following a drawdown in the first quarter. Looking ahead to the remainder of 2025, we anticipate steady sales growth driven by new indication launches, increased contribution from the PCP and pediatric channel through our partnership with Kowa and continued share gains in a sizable topical market, primarily coming from steroid conversion. That said, ZORYVE is not exempt from the seasonality that typically affects prescription topical products. As a result, we anticipate a moderation in our sequential growth rate in the third quarter before returning to robust growth in the fourth quarter. I'll provide additional detail on this shortly. As shown on Slide 10, ZORYVE prescription volume reached a record high of 16,000 weekly scripts on a rolling 4-week average basis. The nearly 200,000 total prescriptions in the quarter reflect a year-over-year volume increase of 117% and a quarter-over-quarter increase of 13%. This strong performance is enabled by the substantial breadth of adoption across prescribers with over 18,000 healthcare providers writing prescriptions in the second quarter and 26,000 since launch. This quarterly figure represents a 7% increase in the number of total prescriptions quarter-over-quarter and nearly 70% increase year-over-year. We continue to see an erosion of topical steroid share within the topical market. In Q2 2025, branded nonsteroidal volume grew by 40% versus prior year, while topical steroid volume was effectively flat. ZORYVE is playing a key role in driving the shift as prescribers continue to appreciate its potential for sustained treatment of chronic inflammatory skin conditions compared to the intermittent use that is appropriate with topical steroids. We are in the early stages of launching ZORYVE foam 0.3% for patients with scalp and body psoriasis following FDA approval in May. We expect this launch, along with the anticipated approval of ZORYVE cream 0.05% for patients aged 2 to 5 years old in October, to drive further volume growth in the second half of this year. While we continue to expect strong overall growth for ZORYVE in 2025, including in the third quarter, the pace of growth in Q3 will reflect the typical seasonality of the topical market. This is influenced by nonmedical factors such as summer vacations and medical factors, including reduced flaring of inflammatory skin conditions during the summer months. As a result, we anticipate some moderation of growth in Q3 before returning to a more robust trajectory in Q4. Let's now turn to our recent approval for ZORYVE on Slide 11. In May, we received FDA approval for ZORYVE foam 0.3% for the treatment of plaque psoriasis of the scalp and body. As Frank mentioned, more than half of plaque psoriasis patients have scalp involvement. Historically, these patients have managed their condition with a combination of topical steroids and other treatments, depending on plaque location, resulting in a frustrating polypharmacy approach. The ability to use a single product once daily across all affected areas offers a meaningful reduction in treatment burden. ZORYVE foam 0.3% delivers reliable plaque clearance and rapid itch relief in a formulation specifically designed for hair-bearing areas and appropriate for use near the eyes and other sensitive areas. We are confident this label expansion will drive incremental demand for ZORYVE, particularly as the foam displaces other treatment options for scalp psoriasis. Since the foam formulation for seborrheic dermatitis and psoriasis are on the same SKU across both indications, it will take additional time to accumulate sufficient longitudinal data to accurately parse out contributions by disease. However, we have seen an acceleration in foam growth with a 9% increase in volume in the 6 weeks since launch compared to the prior 6 weeks. As previously noted, our analysis indicates that clinicians who prescribe ZORYVE across multiple indications tend to generate significantly higher prescription volumes overall as they recognize the meaningful disease management benefits ZORYVE delivers for patients.

Thank you, Todd. I want to start by reiterating the strength of this quarter. Our improved operating leverage allowed the strong top line growth to translate to a reduction in cash burn, and reemphasizes that our disciplined approach to capital allocation has us on a path to cash flow breakeven in 2026. I'm on Slide 21, showing financial results both year-over-year and quarter-over-quarter for the second quarter of 2025. As Todd has stated earlier, we generated net product revenues in the quarter of approximately $81.5 million, which is up 164% from Q2 of 2024 and 28% from Q1 of this year. Cost of sales in the second quarter were $7.5 million compared to $3.5 million in 2024, primarily driven by increased ZORYVE sales volume. Cost of sales decreased 15% sequentially versus the first quarter of 2025 despite increasing sales volume due to an expense recognized in the first quarter for the catch-up amortization of a $10 million sales milestone owed to AstraZeneca for reaching $250 million in cumulative net sales. For the second quarter of 2025, our R&D expenses were $19.5 million versus $19.3 million for the corresponding period in 2024. Our R&D spend has remained consistent year-on-year as decreased development costs for roflumilast in adult atopic dermatitis and plaque psoriasis were partially offset by an increase in development costs for pediatric atopic dermatitis. SG&A expenses were $69.2 million for the second quarter of '25 versus $58.2 million in the same period last year, up 19% as we invested in our commercial organization to support our current and upcoming launches. Recall, we expanded our sales force in the second half of 2024. SG&A expenses were also up approximately 9% as compared to the first quarter of '25, primarily due to increased sales and marketing costs related to our launch in scalp and body psoriasis. Net loss for the quarter decreased by $36.4 million compared to the same period last year and $9.2 million versus the first quarter of 2025. While this rate of improvement in operating results will fluctuate across quarters in line with sales, it clearly demonstrates that we are making substantial progress towards reaching cash flow breakeven in 2026 and that the foundation of our business is strong and getting stronger.

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

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

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

Yes. So Seamus, maybe I'll answer your second question first, and then I'll ask Todd to address the question around revenue. I think that from a clinical standpoint, it's pretty clear that ZORYVE has very broad applicability across a whole range of diseases, I think potentially even some non-inflammatory conditions. But they're not probably all worth us pursuing an indication for. I think we will look to generate data to inform the dermatology community where it's appropriate. And then we'll look at those opportunities and determine if the market is big enough, and if the magnitude of clinical improvement versus existing therapies is significant enough that it justifies pursuing an indication. So we'll be very rigorous and selective in choosing those diseases where we think it's worth spending the money to do a full registrational program. But I'm pretty confident that there are going to be other diseases that it makes sense for us to pursue an indication for, particularly given how stringent insurance companies have become about the off-label reimbursement of drugs. It's very different than it was 10 years ago even. So I think there's a lot of upside opportunity for us. There are a lot of steroid prescriptions for diseases other than our currently approved indications. And so we'll just need to be very rigorous and methodical in choosing which ones we generate data on and which ones we pursue an indication for. Turning to the business development side, I would say that our primary focus is really on development stage assets. Patrick and his team and Bethany and her team on the tech side have, I think, proven that they are really outstanding, I would even say, best-in-class in dermatology and their ability to complete clinical development, regulatory approval. And then Todd and his team have shown how they can effectively operate commercially as well. So we think that's probably the best area for us to focus on in terms of creating value for shareholders. We are not a spec pharma company. I'm not interested in going around and just buying revenue and adding that to the pipeline. I don't think that's a good way for us to create shareholder value. But leveraging the development expertise of this company, I think, is a great opportunity. And we continue to focus primarily on drugs where there is biological validation of the target. So we're not taking on too much biological risk where there's a large unmet need and where we find an asset that is really differentiated from other assets; we're not going to be pursuing a bunch of me-too assets. So hopefully, that addresses your question. And we'll talk about this a lot more at the R&D Day. And then I'll turn it over to Todd to talk about Q3 and the rest of the year.

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

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

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

Yes. This is Todd. Yes, thank you for the question. As discussed before, we anticipated a slower adoption of ZORYVE in the primary care market versus the dermatology market due to the longer selling cycle that's required, also with primary care physicians not being as familiar with nonsteroidal topicals. And we are seeing that slower adoption of ZORYVE within the primary care market. However, Kowa is taking the right actions to make certain that we have the right frequency on the right targets with the right messaging and also making certain that they continue to educate primary care physicians and other opportunities like peer-to-peer programs, speaker programs, and such. Relative to the national pharmacy, we're seeing very positive signals with the early launch of that national pharmacy. And as mentioned, it's critical that we provide a dedicated pharmacy that will appropriately enable and support the primary care physicians relative to the fulfillment process with ZORYVE. And once again, we're seeing positive signals with that and are encouraged by Kowa's continuing to adapt and execute on the right targets with the right frequency and what we expect from this national pharmacy.

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

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

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

In terms of gross to net, it has remained stable for the quarter and is in the 50s. We have not provided specific details on the products, so I will keep it to the 50s.

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

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

We had three additional patents issued in the quarter from the U.S. Patent Office. None of those extended the LOE for the product, but they further strengthen our IP portfolio. We now have 24 issued U.S. patents, many of which are listed in the Orange Book. This reflects the continued strength of our intellectual property portfolio around ZORYVE.

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

So we talked about the initiation of a 3- to 24-month study in atopic dermatitis with ZORYVE, that's the 0.05%. That is a sponsored clinical trial that's part of a post-marketing commitment that we have in order to continue to step the age down that we are conducting as a sponsored registrational clinical trial. The other 2 Phase II studies that we're talking about are collaborative research trials, which are being done to get an early understanding of the potential efficacy in 2 of these indications, which are not currently approved indications, but where we have seen some evidence of efficacy coming from case reports. And so that will give us a kind of quick and early understanding of what the efficacy might and safety might be in that disease state to help us to then make decisions on whether or not to pursue a registrational program for one of these indications.

And just to clarify, those Phase II studies are in hidradenitis suppurativa and vitiligo; I believe both of them are posted on clinicaltrials.gov now.

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

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

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

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

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

We are very enthusiastic about the upcoming opportunity for treating 2- to 5-year-olds with atopic dermatitis, especially with the anticipated approval in October. Out of 9.6 million pediatric patients, around 1.8 million are within this age group and are currently receiving topical treatment. We recently attended the Society for Pediatric Dermatology meeting in Seattle, where we gained valuable insights into the significance of this age group. Many of these patients are challenging to manage, as the condition often starts early in life and parents tend to avoid using topical steroids. Our goal is to provide a treatment option for these younger patients, beginning with the 2- to 5-year-old age range. Additionally, we are initiating a trial for the 3- to 24-month-old group using the same concentration. This aligns well with the needs of parents who prefer to manage their children's condition without topical steroids, coupled with the positive results we've achieved so far. Therefore, we are looking forward to the upcoming approval.

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

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

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

Congratulations on the progress. I'm curious about Slide 11. As more writers or doctors begin writing for additional indications, they seem to experience a significant increase in the volume of scripts. How long does it usually take for doctors to start writing multiple scripts? Do they approach it gradually? Are there strategies you can implement or have already started to implement to encourage individual doctors to write for more indications?

Yes. Arcutis is in a very good position with ZORYVE. And what I mean by that is that with the recent launches that we've had with indications, the dermatology prescribers have already had experience with ZORYVE, whether it be with the cream 0.3% for psoriasis or the own formulation for seborrheic dermatitis. This drives rapid uptake relative to the other indications or formulations that we've launched. And we do see that within the data that a good portion of our prescribing base has adopted the full formulary. This creates efficiencies with their prescribing, both with the patient, but also on the fulfillment side, given that's the same co-pay card, same pharmacy, same process. So that it's a differentiation ZORYVE as an asset, meaning that across the different formulations and products, you can write the product relative to any duration time anywhere on the body. We have a proven efficacy, proven safety. So this type of differentiation really compels the providers to continue to adopt the new formulations and indications we put into the market.

Congrats on the progress. A couple of questions from us. So following up on the Medicare discussion, what drug classification would ZORYVE fall into in your Medicare coverage discussions or negotiations? Is it classified along with topical steroids? Or can you get your own separate classes of topical PDE4? And also, what is the progress in Medicaid over the last quarter?

Relative to with regard to Medicare relative to the class, the market basket, if you will, we would be within the dermatology topical basket as how Medicare would position ZORYVE. In reference to Medicaid, we've had exceptional success in expanding our Medicaid access. If you think about it, and as mentioned, more than half of Medicaid patients now have access to ZORYVE. And most often, that's only a single step through a steroid. And we continue to be steadfast in expanding that access, ensuring that Medicaid recipients continue to have expanded access to ZORYVE.

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

Yes. It would be difficult to get just a PD4 class. They want to keep the topical products in the same market basket. And actually, that's advantageous for us given ZORYVE's differentiation, not only from an asset, but how we strategically price the product within the market. So you take that strategic pricing within the market and you also take into consideration that the average utilization of tubes per patient per year is 2 to 3. We're a great value proposition to the Part D plans as well as the beneficiaries.

I would say at this point, no change. I think that Opzelura is really a distinct situation, especially because of the label they have in Europe and the lack of comparators for that indication in Europe. I think for ZORYVE and some of the other advanced topical therapies, the reimbursement landscape in Europe is particularly challenging. And you lay on top of that some of the potential domestic risks around MSN pricing, and we feel that the business case right now in Europe isn't compelling enough for us to pursue that.