Arcutis Biotherapeutics, Inc. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics 2025 Third Quarter Financial Results and Investor Day presentation. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Scholkoff, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today to review our third quarter 2025 financial results and business update. Slides for today's call are available on the Investors section of the Arcutis website. Joining me on the call today are Frank Watanabe, President and CEO of Arcutis; Todd Edwards, Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and Latha Vairavan, Chief Financial Officer. We will also be joined later in the call by Douglas DiRuggiero, a certified physician assistant and doctor of medical science, who has specialized in dermatology for the past 25 years and is the founding President of the Georgia Dermatology Physician Assistant Society. I would like to remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all of the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that, let me hand it over to Frank for a brief introduction of today's call.

Thanks, Brian, and thanks to all of you for joining us today and freeing up some additional time in your calendars for what we believe will be a compelling review of the strong foundation of our business today and a more in-depth look at our strategy to sustain our growth in the future. We'll start today's call by reviewing our commercial and financial results for the third quarter. As you'll hear from Todd and Latha in a moment, we achieved yet another strong quarter with robust net product revenue growth and continued steady growth of prescriptions across all approved formulations and indications for ZORYVE. We'll then move on to the Investor Day presentation, where we'll do a deep dive into why we are excited by and confident in the future of Arcutis and our unique potential to address key unmet needs for patients impacted by immune-mediated dermatological diseases. Today's discussion on our corporate strategy is timely and pertinent as we approach cash flow positivity, enabling us to self-fund investments in our business that will sustain the continued growth of Arcutis. Our excitement is grounded first in the outstanding growth opportunities for ZORYVE, a revolutionary topical agent that is already reshaping the treatment of chronic inflammatory skin diseases, and the impact we foresee only amplifying in the years ahead. As you'll hear today, we have multiple opportunities to grow and further expand our ZORYVE business, and we have the capabilities and resources to exploit those opportunities. We'll also go into more detail today about our exciting pipeline building efforts, starting with ARQ-234, a novel biologic with best-in-class potential to address a large unmet need in atopic dermatitis. Complementing the ZORYVE franchise, ARQ-234 and future pipeline opportunities will enable us to extend our mission to champion meaningful innovation for patients impacted by immune-mediated skin conditions and strengthen Arcutis' position as one of the industry's most consequential medical dermatology powerhouses. I'd also like to take a moment to thank the Arcutis team for their efforts and commitment to bringing better outcomes to patients living with serious skin diseases. Their unwavering dedication underlies our achievements to date and will be the foundation for the ambitious plans we discussed today. So thank you all again for taking the time to join us today. And now I'll turn the call over to Todd for our Q3 commercial update.

Thank you, Frank, and good morning, everyone. Turning to Slide 6. As Frank noted, we continued to deliver strong revenue growth, driven by the increase in adoption of the ZORYVE portfolio by both patients and clinicians across all approved indications. In the third quarter, we generated net product revenues of $99.2 million, reflecting 22% sequential growth and a 122% increase compared to the same quarter of 2024. The substantial revenue expansion was fueled by growing demand for ZORYVE supported by rising prescription volume across all products in our portfolio. This accessible launch has been a reform for the treatment of plaque psoriasis; the scalp and body contributed meaningfully to the expansion in demand and helped to offset typical third quarter seasonality headwinds. Improved gross to net rates during the period also contributed to sequential sales growth driven by reduced utilization of patient co-pay programs as patients progress through their annual deductibles earlier in the year than anticipated. As a result, we expect the quarter-on-quarter gross to net improvement to be more limited in the fourth quarter, consistent with historical trends, with only modest additional benefit expected from co-pay program usage. On Slide 7. Consistent with previous quarters, our Q3 growth was driven by sustained demand growth across all strengths and indications. Total prescriptions for ZORYVE increased by 13% compared to Q2 and by 92% versus Q3 2024. Weekly prescriptions on a rolling 4-week average basis reached a new record high with over 17,000 scripts. Following the FDA approval as the reform is 0.3% for the treatment of plaque psoriasis, the scalp and body in May and a subsequent launch in June, we experienced particularly strong performance from the foam product, with product revenue increasing by more than 25% versus the prior quarter. The inflection in total ZORYVE volume following the launch, as illustrated in the graph, demonstrates the significant impact of this new indication launch. Importantly, we also continued to see steady and growing volume for ZORYVE cream 0.3% during the period, reflecting sustained demand across both formulations in plaque psoriasis. Overall, our sustained momentum in Q3 highlights ZORYVE's exceptional utility, the growing confidence in our brand among both clinicians and patients, and more importantly, the broader treatment shift driven by steroid conversion. In today's presentation, we will further discuss the dynamics behind the shift away from topical clinical steroids. And I look forward to sharing the additional actions we are taking to catalyze and accelerate this transition in the near term. Looking ahead to the fourth quarter, we anticipate continued strong net sales growth driven by increased patient demand even as we expect only nominal improvements in our gross to net rate compared to the third quarter. This growing demand will be further supported by the launch of ZORYVE cream 0.05% for atopic dermatitis in children aged 2 to 5 years old. With that, I'll turn the call over to Latha to review Q3 financial results.

Thank you, Todd. I'm now on Slide 8. As Todd just reviewed, we generated net product revenues in the third quarter of approximately $99.2 million, which is up 122% from Q3 of 2024 and 22% from Q2 of this year. Cost of sales in the third quarter were $8.7 million compared to $5.5 million in Q3 2024, primarily driven by increased ZORYVE sales volume. For the third quarter, our R&D expenses were $19.6 million versus $19.5 million for the corresponding period in 2024. Our R&D spend was consistent with the prior year as clinical expenditures shifted from ARQ-255 to pediatric reform studies. Moving forward, we expect an increase in our R&D spend in 2026 as we continue to advance ZORYVE life cycle management, clinical development activities, and initiate our Phase I trial of ARQ-234. SG&A expenses were $62.4 million for the third quarter of 2025 versus $58.8 million in the same period last year, a 6% increase attributable to investments in our continued commercialization efforts of ZORYVE. But SG&A expenses were down approximately 10% as compared to the second quarter of 2025, primarily due to a decrease in promotional and marketing spend resulting from timing of expenditures between quarters. Net income for the quarter was $7.4 million compared to a net loss of $41.5 million for the same period last year and a loss of $15.9 million for the second quarter of 2025. The net profit generation in the quarter was driven by the $17.7 million sequential increase in net sales concurrent with a $5.4 million reduction in operating expense. While we do not expect our net income to remain positive in the near term, the improving operational leverage that we demonstrated in the quarter with growing net sales contribution from ZORYVE outpacing increases to our core expense base speaks to the profit generation capacity of the ZORYVE franchise. We previously communicated that we anticipated achieving cash flow breakeven in 2026. However, the continued momentum of ZORYVE net sales growth, combined with our expense discipline has facilitated the acceleration of this important milestone, and we now expect to achieve cash flow breakeven in the fourth quarter of 2025. Now turning to Slide 9, our cash and marketable securities balance as of September 30, 2025, was $191 million, with cash burn from operations of $1.8 million for the period. We have total debt of $108.5 million and have the option to withdraw another $100 million in whole or in part at our discretion through the middle of 2026, providing us with the flexibility to invest in the continued expansion of our business. The success of the ZORYVE franchise and the economies of scale we are generating will permit us to invest in the business for sustained growth over the years ahead. I will elaborate on this when discussing our capital allocation strategy later in today's presentation. With that, I'll turn the call back over to Frank to kick off the Investor Day portion of today's call.

Thanks, Latha. We founded Arcutis in 2016 to address what we saw as a significant innovation gap in the immunodermatology drug development space. We recognized that the vast majority of dermatology patients were being treated by older therapies that offered inadequate efficacy, did not target specific disease mediators, and/or carried substantial safety and tolerability issues. So we set out to identify, develop, and commercialize best-in-class molecules that would address unmet needs in dermatology by directly targeting immunological mediators of inflammatory diseases. We have been extremely focused, deliberate, and successful against this goal, steadily executing on the promise of ARQ-151 and ARQ-154, now known as ZORYVE Cream and ZORYVE Foam as a true pipeline in a molecule opportunity. As we approach the significant milestone of achieving cash flow breakeven, we've been thoughtfully planning Arcutis' next phase where we will apply the same focus and dedication to ensuring long-term growth, success, and most importantly, continued impact for patients. As outlined on Slide 11, three pillars provide the strategic framework for sustaining our company's near- and long-term growth. First, we will continue to grow our core ZORYVE business as we establish ZORYVE as the foundational therapy for adults and children who need ongoing therapeutic solutions for managing psoriasis, seborrheic dermatitis, and atopic dermatitis. A significant component of the growth pillar is our sustained efforts to meet the increasing calls for safer, more targeted topical alternatives to topical steroids, a topic we will be spending a good deal of time today talking about. This pillar also includes our efforts to expand into primary care and pediatrics and in-line growth opportunities, such as our recent launches in scalp and body psoriasis and pediatric atopic dermatitis and incremental data generation opportunities to bolster ZORYVE's position for our currently approved indications. Second, we plan to expand the ZORYVE franchise through strategic life cycle management. Specifically, we are evaluating new potential indications that represent significant unmet needs and where patients would benefit from ZORYVE's unique profile. Our new indication exploration, a core tenet of our clinical development strategy, will be guided by a large body of case reports from clinicians who have used ZORYVE in various other inflammatory dermatosis and have seen encouraging signs of efficacy. And finally, we will build our pipeline advance by advancing other innovative medicines for patients, leveraging the best-in-class clinical development and commercialization capabilities we have developed at Arcutis. Our focus initially will be on ARQ-234 and in parallel on potentially sourcing promising external innovation. As you'll see on Slide 12, we've designed today's agenda to align with these three strategic pillars I just reviewed. We'll cover sustainable growth drivers for ZORYVE's current indications. As part of the presentation, Patrick will host a Q&A with the eminent dermatology physician assistant, Douglas DiRuggiero, to gain a clinician's perspective on the changing treatment landscape. We'll follow this with an overview of our expansion efforts, including our exploration of potential new indications for ZORYVE with initial efforts in vitiligo and hidradenitis suppurativa. Finally, on the ZORYVE front, we'll provide some insights into peak sales potential. We'll then move forward to a discussion of our pipeline building strategy, which will include a review of ARQ-234 and its opportunity to address a significant unmet need in atopic dermatitis and an overview of our framework for evaluating business development opportunities. Lastly, we'll wrap up with a review of our capital allocation and balance sheet strategy before opening up the call to Q&A. With that, let's dive right into the agenda.

Thanks, Frank. Slide 15 provides a clear illustration of the sizable and realistic market opportunity for ZORYVE. In the U.S., across our currently approved indications of psoriasis, seborrheic dermatitis, and atopic dermatitis, the diagnosed population totals approximately 30 million patients. Of these patients, about 19 million people are already receiving topical treatment, primarily topical corticosteroids prescribed by clinicians in every specialty. Within this group, roughly 8 million are being treated in a dermatology specialty setting. The area where Arcutis has concentrated its commercialization efforts to date. As a result, the serviceable obtainable market of patients who are already under dermatology care and are already receiving a topical prescription for their psoriasis, AD, or seb derm is both substantial and highly addressable. The key question then is what share of this market will ZORYVE recapture? Given ZORYVE's differentiated clinical profile, the strong foundation established during the early phases of commercialization, broad reimbursement coverage, the shifting treatment landscape, and the strategic actions we are taking to drive both prescribing breadth and depth, we believe increasing the ZORYVE share to 15% to 20% of topical steroid prescriptions or potentially more is both realistic and achievable. As we'll outline further today, there are compelling reasons to believe ZORYVE is positioned for significant and sustained growth in the years ahead.

Thank you, Todd, and good morning, everyone. We want to spend some time expanding on the momentum behind steroid conversion. First, because it signals a crucial paradigm shift in the treatment of immune-mediated inflammatory skin diseases. And second, because it provides a key data point to support our obtainable market thesis that Todd outlined. So what exactly is driving this conversion, and why does it matter? The first successful use of corticosteroids for chronic inflammatory skin diseases was reported in 1952. In more than 70 years, we've seen remarkable scientific and medical innovations across many therapeutic areas and treatment modalities. But topical steroids have remained a mainstay in the management of conditions like atopic dermatitis and psoriasis. The introduction of biologics has represented a major advancement in the treatment of immune-mediated inflammatory skin conditions. However, even as the introduction of these novel therapeutics has benefited the subset of patients with more severe diseases, topicals overwhelmingly remain the first-line therapy for the vast majority of patients. And even patients on biologics often continue to rely on adjunctive topical treatments in order to manage residual disease and breakthrough flares. There's an increasing recognition among health care providers, professional societies, and patients that the long-term use of topical steroids can be associated with serious adverse effects that can both be local and systemic. This sets the stage for intensifying calls to limit long-term topical corticosteroid use and embrace innovation in the topical modality. To help you understand what has galvanized this loud global call of concern about the use of topical corticosteroids, I want to frame the problem at hand. And to accomplish this, we've adopted a slide from a recent review article written by Douglas DiRuggiero, who I will be speaking to later in this program. On the left-hand side of Slide 17, we see the list of common local adverse effects of chronic steroid treatment. Most of these were well documented all the way back in the 60s and include skin barrier damage, atrophic changes like striae or stretch marks, cataract formation, and delayed wound healing. Importantly, adverse effects related to topical corticosteroids are not limited to local effects. What you see on the right-hand side of the slide is the list of systemic effects, which are broad and deep, including disruptions in reproductive endocrinology, growth suppression, osteoporosis and bone fracture, diabetes, and ophthalmic effects, including cataracts and glaucoma. The clear association of cumulative topical steroid exposure and increased risk of bone fracture and diabetes have only been fully appreciated more recently as multiple publications emerge that validate the growing concern that long-term adverse effects of topical steroid use are not that different from the well-known adverse effects that have made systemic steroids a treatment of last resort for most inflammatory diseases. While the risk of these effects increases with steroid potency and duration of use, there have been cases reported with low-potency agents or short periods of use. Additionally, infants and children may be most at risk because their skin disease typically involves a higher body surface area than adults and their immature skin barrier can result in greater permeability. Lastly, patient populations at even higher risk include those who use topical corticosteroids on the face or genital areas, as that skin is not only more prone to local adverse effects but is associated with greater skin permeability and drug absorption, especially in those with atopic dermatitis. Clinicians are increasingly realizing that many patients are not only exposed to topical steroids but also may be using other steroid treatments like inhaled, intranasal, and even oral steroids, and this total cumulative steroid exposure dramatically increases the risk of adverse steroid effects. Given all this, you can understand why we are so passionate about addressing these mounting concerns and leveraging scientific innovation to bring more targeted therapeutic solutions to patients that are both effective and safe. As you can see on Slide 18, in August of this year, two of the primary professional dermatology societies in the U.S. — The Society of Dermatology Physician Assistants and the Society of Dermatology Nurse Practitioners — issued statements recognizing the emerging evidence of these potential adverse effects and the importance of incorporating advanced topical targeted therapies that reduce the reliance on chronic topical steroid use. These statements are the latest in a growing list of high-profile calls for the limited use of topical steroids due to the adverse effects, including calls from regulatory agencies in Canada, the United Kingdom, and India, other professional societies, such as the International Eczema Council, British Dermatological Nursing Group, British Association of Dermatologists, and the American Academy of Family Physicians, patient advocacy groups like the National Eczema Society and National Eczema Association, as well as several recently published physician expert consensus panel recommendations. This represents not merely an isolated regional appeal but a global groundswell. In the U.S., the recent acknowledgment by the SDPA and the SDNP is particularly important given the key role physician assistants and nurse practitioners play in treatment decisions for patients with chronic inflammatory skin conditions. Next, we'd like to share a conversation I recently had with Douglas DiRuggiero on the evolving topical treatment landscape for immune-mediated dermatosis. Douglas DiRuggiero is a certified physician assistant and a doctor of Medical Science who specialized in dermatology for the past 25 years. Douglas practices with the Skin Cancer and Cosmetic Dermatology Center, a nationally recognized provider of advanced adult and pediatric dermatology care in Northwest Georgia and Southeast Tennessee. Douglas is also the founding president of the Georgia Dermatology Physicians Assistant Society and was recently named a national honoree by the National Psoriasis Foundation, the first time a physician assistant has ever received this award. He's written and spoken extensively on the topic of potential adverse effects from prolonged use of topical corticosteroids. I think it might be good to frame the conversation with Douglas by highlighting the role that physician assistants and nurse practitioners play in the dermatology field. NPs and PAs are providing an increasing amount of direct dermatology care, including prescription writing; this expanding role is in part being driven by heightened demand for dermatological care as dermatologists provide care in medical dermatology as well as surgical procedures and cosmetic services. These NP and PA providers are filling critical gaps and ensuring patients with skin conditions have access to the vital and high-quality care they need.

Well, first off, I'm honored to be here. Thank you for inviting me. When I stepped into dermatology 26 years ago and have been there ever since, I was very easily led into topical corticosteroids as being the medication for all things. And it has had an impact, I would say, on the trajectory of dermatology, probably more than any other product in our specialty. And so it's been around for a long time, since 1952, when it was first compounded into something that we could use on the skin, and it's been used ever since. So my experience when I got into this in 1999 was that topical corticosteroids were a mainstay of therapy, first line, second line, third line, maintenance therapy, all of the above. But we didn't have the targeted therapeutics we have now to address some of these systemic diseases with systemic therapy. So we were using a lot of topical steroids and topical tar and a lot of compounded things in phototherapy and a lot of the old traditional systemic medications. So the playing field has changed tremendously, not just with targeted systemic therapeutics, but now with vehicles, with delivery systems to the skin, and with active ingredients that are finally giving us the efficacy of steroids without the side effects that we have always known about and have largely not — largely, I would say, to a certain extent, maybe turned a blind eye to, and we simply can’t do any longer. There’s just too much data out there, both public knowledge and prescriber knowledge, that we have to face the facts that steroids carry a lot of dangers. And we can’t transfer that danger, or at least I can’t transfer that danger any longer on to my patients without really having a lot of information to give them. So it’s a shared decision-making process.

Yes. That was one of the things I really took away from your paper. I think that historically, there’s been a lot of conversation around local side effects. And I think a lot of people felt somewhat comfortable, especially when there wasn’t another option with that. But I think one of the things that you really highlight well in the paper are some of the new areas of data that have come out highlighting these systemic effects. Is there kind of like one aspect of that in particular that impacted you the most? I know in the paper, you talked about diabetes, you talk about bone fracture and osteoporosis, any particular area that was impactful for you?

Well, I’ll tell you two stories that drove that, and I’ll answer that question indirectly through this. I had a patient who is a 13-year-old boy who came in for eczema, atopic dermatitis, and I put him on triamcinolone, which is a very commonly prescribed mid-potency prescription steroid, and he was a type 1 diabetic. He had been since he was about 6. So he had a pump and he had a monitor, and he was able to watch his sugars closely. And the mother came in, this is about three years ago, and told me that we could put triamcinolone on his two forearms, and we could watch his blood sugar go up 40 points in 40 minutes. I was just shocked by that, that they could see that rapid of a rise in his glucose levels with the application of a topical steroid cream on about 5% to 7% of his body surface area — not like this whole body. I began doing some research on this and would say, what are really the systemic side effects to this? We are focused in dermatology, and we do a good job of counting our patients against the cutaneous side effects. If you use it too long and in the wrong areas and unfolds, it could extend the skin, what we call atrophy, you could have steroid-induced acne or folliculitis, you could get unwanted hair or hypertrichosis; it could create dyschromia or discoloration. I asked all of these very experienced derm providers. If a mom wants steroids and she’s demanding them, what reasons will you give her? Or to an adult patient, what reason would you give them on why they should not have more steroids? They all listed all of those things. No one listed anything systemic because we associate all the systemic side effects with giving them systemic steroids. And we do not and have not been trained and do not recognize the whole body of information out there that shows that these medicines are highly absorbed, and they act like a systemic drug like you’re taking it orally or injecting it. So yes, we have a lot of data out there that shows that it will raise blood sugar, diabetes; it can create something called Cushing’s syndrome or adrenal insufficiency. But the surprising one for me is the data out there on developing avascular necrosis of the hip: 20- and 30-year-olds who have only been on topicals, no other systemic case reports, having had hip replacements. I highlighted a couple of those in the recent lecture I gave. Osteoporotic fractures: I talked about a case report of an 11-year-old, we’d been using mid- to high-potency corticosteroid creams only, no systemics, just topicals for 3 years, and he had a wrist fracture and full-body osteoporosis like an 80-year-old, and this kid’s 11 and had an osteoporotic fracture. And so we are seeing now that increase in ocular pressure in the eye. We used to think that if you just use steroids around the eye, you increased your chance of that. Now we know you can use steroids anywhere on the body and increase your risk of glaucoma and increased ocular pressure. So we can’t turn a blind eye any longer to the internal systemic impact of using an external topical steroid because it is acting like we’re giving it internally, and we’ve got to face those facts. And it should change the way we prescribe and it should change the way we educate our patients about these things.

What are you hearing from your peers on this idea of the role of topical corticosteroids and how that may be changing over recent times?

It’s really a lot of shock, to be honest with you, when they see the data because it’s not something that’s being talked about in the clinic. These trials and these case reports and these meta-analyses and the systemic analysis are not really being championed and put forth. Quite frankly, we're often forced by insurance companies in a lot of areas to use topical corticosteroids first line before we can go and use the medicines that we feel like are safer and work just as well. So some of it is step-through therapies, and some of it is just simply lack of knowledge. The reaction I get is one of like, I just cannot believe. When I present this information, I present it in a very self-reflective way because I have been one of the top prescribers of topical corticosteroids in my state for many years. So I’m looking in the mirror and saying, how much have I contributed to these things without knowing it? But I can’t willingly continue to contribute to it. I think that’s what a lot of people have. I’ve gotten a lot of incredible comments, emails; people have called me to tell me about the impact that this data has had on them and how it’s changing the way that they are treating patients, how they’re beginning to keep track of the grams of steroids that they’re giving out, how they’re asking about other forms of steroids that the patients are getting. These are just not things that we’ve been used to slowing down and monitoring what we’re calling corticosteroid stewardship in order to catch up to some of our colleagues that are overseas or in Canada, where they’re beginning to heavily monitor these products and give patient warnings when they’re dispensed from the pharmacy. Other countries are beginning to see this and have already begun to be proactive with educating and monitoring these things; the U.S. really needs to take a role in this, in my opinion. I feel like a lot of us in dermatology have the ability and now have some momentum to make this happen.

And you made reference to these advanced targeted topical therapies like ZORYVE. How do they play into this evolution and this change over the course of your practice, given that topical corticosteroids are still the majority of the prescriptions that are written for patients with some of these chronic inflammatory skin diseases like atopic dermatitis, psoriasis, and seborrheic dermatitis?

In the second quarter of 2025, while I don't have the third quarter numbers, recently, I wanted to know how many prescriptions for topical corticosteroids were filled by dermatology practices exclusively. The highest estimate I've heard is 500,000 in a quarter, with most guesses ranging from 200,000 to 300,000 prescriptions written by the approximately 20,000 dermatology providers. When I mention that the actual number is 2.9 million prescriptions filled by patients in just one quarter, not over a year, it really surprises people. They are often shocked to learn how much we contribute to this. Even if I manage to change just 1% of that, which amounts to 29,000, it would have a significant impact in a single quarter. The numbers really alarm us in dermatology, as we see how much we are contributing to this issue. Fortunately, we now have excellent alternatives like ZORYVE. Historically, we've had nonsteroidal topical calcineurin inhibitors, with the first approved in 2000, followed by another in 2001. However, the tolerability was challenging, especially with tacrolimus, which can burn, and while pimecrolimus is less irritating, it doesn't work effectively. Then we introduced a first-generation PDE4 inhibitor between 2014 and 2016, which again had tolerability and efficacy issues. Patients want to achieve clear skin, and we want to see them succeed. It has been difficult to rely on pimecrolimus, but now we have ZORYVE, which I can confidently say performs as well as mid- to high-potency steroids based on my experience, supported by studies. It's a once-a-day treatment that can be used anywhere without limitation on duration or location. The beauty of a product like ZORYVE is its simplicity; it eliminates the complex regimen where patients might need various potencies for different areas requiring detailed plans for when to use each one. It's rewarding to see their relief when I explain that this is a single cream they can apply anywhere, once daily, with excellent clearance rates and minimal itchiness, whether they're dealing with atopic dermatitis or psoriasis.

So in that setting, what do you see as the biggest barrier then for some of these advanced targeted topical therapies? What do you see as that barrier? You’ve talked about some of the differences in the profile between them and steroids. I talked about that earlier as well. But is it really a profile issue, or are there other things that are playing into this transition that you’re talking about?

I’ve mentioned before about step-through therapies. Our biggest challenge is insurance plans requiring us to recommend treatments we prefer not to use first, making it difficult to get approvals for other options. When a representative comes in, they should be asking, "Will you advocate for us?" Just getting a trial is one thing; often it just leads to denial, and then we revert to our usual generic prescriptions. They need to push for a product that is safer and effective to convince the insurance companies of the demand. Convincing patients of safety is relatively straightforward; providing samples or starting them on a treatment helps showcase its effectiveness. The primary considerations will always be safety and, to a lesser extent, efficacy. Then there's the question of convenience—can the medication be easily filled? Will the patient follow the treatment? Compliance is higher with once-daily medications, those that don’t cause irritation, and those that work well. The real compliance issue often stems from insurance companies trusting us to prioritize what’s best for our patients. That’s a significant barrier. Improvements are happening, and I’ve noticed an increase in patients coming in due to TikTok. While we often critique TikTok and online resources, they have their benefits. Patients are becoming aware of corticosteroid withdrawal and its risks, leading many to preemptively express their desire to avoid topical steroids. I've observed a notable shift over the last couple of years, with patients of various backgrounds voicing concerns about steroid use. Even in rural areas, patients regularly ask for alternatives. Recently, a 40-year-old man with atopic dermatitis stated that if I prescribed him a certain medication, it would be his last visit. He mentioned he only comes in every two years to explore new options. There’s a noticeable change; it might not be as rapid as we hope, but it's definitely occurring.

Thank you, Frank. Unfortunately, Todd is not feeling well today and will not be able to join us for the Q&A session, but I am here with Frank, Latha, and Patrick. So we'll jump right in. First question for the team here on the conversion of topical steroids. You discussed in the call the shift in treatment paradigms with topical corticosteroids being replaced by nonsteroidal topicals. What actions are you taking or do you plan to take to speed up this transition?

This is, I think, an extremely important question given the criticality of this process to the future for ZORYVE. I think it's really important to emphasize that this trend towards topical stewardship and being more judicious in the use of topical steroids for really short-duration treatment is a trend that's emerging in dermatology and it's really being driven by the dermatology clinicians themselves. As you heard from Patrick and Douglas on the call today, there's this growing body of evidence that demonstrates the serious adverse effects that come from prolonged topical corticosteroid use, both locally and systemically. The side effects and dermatology clinicians are learning about that as Doug shared, they’re talking about it and they're adjusting their practice. I was actually at the fall clinical conference this past weekend, and there was quite a bit of discussion from the podium about this Patrick mentioned the SDNP and the SDPA statement. So this is something that's happening organically, and it's going to benefit the entire non-steroidal topical class as a whole, but specifically, it's going to help us given our very strong share of that nonsteroidal market. In terms of what Arcutis specifically is going to be doing to accelerate that trend, I think really there are three levers you can think about. I think the first one is the sales force. The second is on market access, and the third is around our marketing activities. We're already in a very good place vis-a-vis the sales force and market access. We added about 40 reps last year around the atopic dermatitis launch. So we have a very strong field presence that covers the dermatology clinicians that are writing about 90% of all the topical prescriptions in dermatology. And then from access — from an access standpoint, folks know we have very strong coverage across commercial and Medicaid beneficiaries, and we're working on expanding the Medicaid even further, and we're also hoping to start obtaining Medicare coverage as well. So I think we're in a really good place from a coverage standpoint. And then finally, with regard to marketing, again, I think we’re in a very strong position. We've been very thoughtful as a company about our marketing investments. because we have to be careful about how we allocate capital, but also because we've been benefiting from this organic shift that I mentioned before that's happening from the grassroots in dermatology. So I think as ZORYVE, the franchise starts generating cash, as Latha mentioned, this is probably one of those areas where we'll be making some incremental investments in our marketing spend.

Great. Thank you. The next question here relates to the commentary on peak sales. The question is, as part of your peak sales guidance, you said you can reach 15% to 20% share of the topical corticosteroid market. What gives you confidence that you can grow from your current roughly 3% share position to that range? And any commentary on how long that process and that share gain will take?

Sure. So you're going to hear from me a lot since Todd is sick today. But I think the best indicator of this transition is already happening, and it's going to continue to occur. The rate with which we're already seeing the nonsteroidal topicals take share from topical corticosteroids. As mentioned earlier in the call, the non-steroidal class is growing very rapidly albeit from a small base, but when you take into account the fact that the nonsteroidal market has grown roughly 50% just in the last year alone, there’s a very strong growth trend and a lot of that’s being driven by ZORYVE. I think that it's important to remember that while we're seeing this very strong growth trend in steroid conversion and this conversation with topical steroid stewardship, it is a very recent phenomenon. If you think about it, the led wall paper just came out in January of this year, the SDNP and SDPA statements just came out a few months ago. So these conversations are happening right now, and they really weren't happening nearly as much a year ago. I think we're really just at the very beginning of seeing the impact of this change in thinking amongst dermatologists. In terms of specifically what's going to be the drivers for ZORYVE's market share going forward, again, I think the most important driver is the increased focus on stewardship of topical steroids that we just talked about, and that's going to necessitate a much greater reliance on nonsteroidal topicals like ZORYVE. Again, we stand to differentially benefit from that shift given our strong share of the non-steroidal class and our growing share of the non-steroidal classes we've discussed already. I think a second lever is our expansion into new treatment settings as we continue to gain awareness and adoption in primary care and pediatrics via our Cola partnership. Third, I think the incremental data generation that Patrick highlighted today is going to be a driver of prescriber behavior for certain key populations like patients with nail psoriasis or palmoplantar psoriasis, which are in our current indication, but we don't have all that much data around that yet. So that will be an important incremental data set. And on the access front, we're in a great place with the reimbursement, but we have further opportunities to go in terms of expanding our Medicaid coverage and also picking up Medicare coverage. Lastly, actions that we take that really highlight or drive patient awareness to reinforce the trends that we're already seeing, where patients are coming in and asking their doctors for something that’s not a steroid, right? There’s a great deal of public conversation around this topic. I think that's going to be another important driver for forward growth. From a timing perspective, again, if you look at the analogs that Patrick spoke about earlier, these paradigm shifts in treatment practice do take time to effect. I think we're very encouraged by the rate of adoption that we're seeing already. I think the demand growth that you saw this quarter is a good data point to show that that's happening. But the shift from these outdated topical steroids to the newer advanced topical therapies is going to take some time. If you look at the analogs, it's somewhere between 5 and 10 years for that to happen, and we're still very early in that process with the topical steroids. It's hard to say, but it's not going to happen overnight; but I think we're very confident it's going to happen for all the right clinical reasons, and we're already starting to see these trends play out.

Okay. Great. And we'll shift gears here to ARQ-234. We've had a few questions come in on this, several of them just making reference to any clinical evidence that already exists derisking the class or the target. But more specifically, a question regarding ARQ-234: Eli Lilly discontinued its CD200R agonist after stopping the Phase II trial in atopic dermatitis for strategic reasons. Are there any learnings you've taken from that program that can be applied to 234 or any comments you can make on differentiation between the two programs?

Yes. Patrick, do you want to take that one?

Yes. We’ve watched the Lilly program very, very closely. I touched on this a little bit in the presentation. I think one of the key reasons why we are confidently moving forward with ARQ-234 really has to do with the structure. The Lilly molecule was a monoclonal antibody that binds outside of the native binding site, whereas we’re a fusion protein that’s engineered for an extended half-life and also has two high-affinity modified CD200 ligands. So really a very different molecular approach. We have preclinical evidence that suggests that we’re getting a higher affinity. So we feel very good about that, and as well as this kind of extended PK half-life that we think could have benefits with regard to our dosing frequency. Of course, that has to be proven out in this study that we’re planning to get started at the beginning of 2026. We’ve watched that program very carefully. Again, a lot of times it comes down to also execution of a study, and we’ve conducted many studies in atopic dermatitis. I think we have an excellent clinical development and clinical operations team. So I think that will also help us to get a very clear understanding. The GWAS data and the kind of early evidence that pushed Lilly into atopic dermatitis still remains. We think that that’s very compelling, and we think the ARQ-234 is the right molecule and atopic dermatitis is the right disease for us to serve further. So we’re looking forward to getting that kickoff.

Okay. Great. The next question here is on the LCM activity. With vitiligo and HS, the question is, as you're investigating ZORYVE in vitiligo and HS, how do you think about competitive dynamics with other drugs that are already approved or in development for those indications? And then as a second part to this question, can you say more about trial design, example, size, whether or not it’s controlled and duration of study?

Sure. Patrick, I think that’s probably best handled by you again.

Okay. Sounds good. Yes. Looking at our life cycle management and competitive dynamics with HS and vitiligo. I think the best place for us to start is to look at these indications where we’re already approved and already in a competitive situation with both topical corticosteroids and branded topicals. Here, what are the elements of our profile that have allowed us to be so successful? It really comes down to efficacy, safety, tolerability, once daily in ease of use, pretty much anywhere on the body, as well as our commercial execution and our access. We have a lot of confidence in our clinical development and our commercial execution, and our ability to leverage these capabilities for both of these new indications. Now thinking specifically about vitiligo, this is a disease where I believe that once daily dosing is going to be really important for patients. Vitiligo patients have to treat for a long period of time, months typically before they start to see benefit with pretty much any treatment. The ability to do that just once a day is going to improve compliance compared to daily dosing. Now for the same reason, the rate of repigmentation is another key potential differentiator. This is something we’re going to be looking at really closely as we conduct this next study, and we’ll have to see those results once they get into the clinic. So turning to hidradenitis suppurativa, there’s a lot of white space for a topical therapeutic that’s targeting inflammation. Right now, treatments are primarily topical antibiotics, and then patients kind of leap all the way to systemic therapy. Being able to have an effective topical treatment that could be used in the earlier stage patients as monotherapy and for later-stage patients as adjunctive treatment to complement their systemic therapy is a very, very strong profile. That’s similar to what we’ve seen in atopic dermatitis and psoriasis. In fact, systemic therapies leave a lot of room for some adjunctive therapy to really help patients to get to their target treatment. So we’re very optimistic about how this profile fits with both of those indications.

Perfect. Okay. So moving on to the next question here, and this is focused on the results for quarter 3, specifically on net sales. And the question is, can you bridge us from the 13% sequential total prescription demand growth to the 22% sequential revenue growth for the quarter?

Yes. Sure. It’s a great question. I think that the primary thing that’s driving the non-volume component of the growth of our product revenue is really improvement in gross to net. I think what we saw in the quarter was, if you think about it, if a patient is still in their deductible for the year, we're buying them down to $0 or $35, and so Arcutis is having to pick up that additional cost from their deductible until they reach their annual deductibles. What we saw in Q3 was that patients have progressed through their annual deductibles, probably at a rate higher than we had expected. We are seeing reduced usage of our co-pay program, and that directly translates into more revenue per prescription, happening earlier than we had anticipated. But I think that also probably means there might not be as much improvement in Q4 on that component as we saw in Q3. I think we expect gross to net to be very stable, probably between Q3 and Q4. It's important to emphasize that all the other things that can contribute to non-demand revenue growth really were not material in this period. So it’s really just the demand growth and the improvement in gross net that are driving this outperformance.

Okay. Great. The next question here is on the topic of external innovation and business development. The question reads, Frank mentioned sourcing external innovation. Would you elaborate on the stage of development, the type of assets from a modality perspective, and then therapeutic categories that you’re interested in, specifically, are you looking for something more adjacent to ZORYVE or more distant from ZORYVE from a diversification perspective?

Yes, sure. So Patrick is leading all these efforts. So I think I’m going to ask Patrick to take that one.

Yes. I think if you look at our pipeline, we have ARQ-234 that's just going to be entering into the clinic and not spending a lot of time talking about the life cycle management opportunities for ZORYVE. Ideally, we’d be looking for an asset which is fitting in between those two. But I think we’re really opportunistic regarding most importantly, finding something that we are very confident about, and we’re very excited about that is fitting an unmet need. Again, we’re prioritizing dermatology because we think that fits best with our expertise. But just given the breadth of knowledge across the team and experience outside of dermatology, we’re not limiting ourselves to dermatology. We’re really looking across inflammation at adjacencies there for assets that would fit very well into our development pipeline. What we’re really looking for is the right asset, and we don’t feel compelled to necessarily bring one in just because of where we are with our pipeline. Because we feel confident about moving ARQ-234 forward and all the opportunity that we have with the ZORYVE life cycle management.

Okay. Great. And staying maybe for a moment on 234, a question came in here: Will ARQ-234 target in AD patients overlap with the ZORYVE target population for that indication? Or how should we think about that?

Yes, Patrick, that’s probably back to you again.

Yes. Our approved indication for atopic dermatitis goes down to the age of 2 and is in the mild to moderate space. So development in systemics and biologics, in particular, typically focuses on moderate to severe. There is some overlap between the two of them. But the most important thing is one of the advantages of the ZORYVE profile is that whether it's label with its safety profile, it's not excluded from being used with systemic therapy. So that’s one of the areas that we’ve heard from a lot of our customers that they found it to be helpful. Many times, patients who are in that moderate to severe area will get pushed down into a more mild to moderate category where they would be, while on a biologic or systemic, would be appropriate for use with ZORYVE. We don’t see them necessarily as competitive just as we don’t see ourselves competing with systemic treatments, but more as complementing each other in the ability to maintain a patient for this chronic disease for their lifetime without having them resort to topical corticosteroids.

Okay. Great. The next question here is back on the topic of BD, and I think we hit on this a little bit, but given your foothold in dermatology offices, would you consider adding a biologic against a novel dermatology target to develop or would you also consider partnering with one already in the development for U.S. rights just to better kind of titrate on what we’re looking at there?

Yes. So that was a two-part question right? I think the question was would we consider a biologic in AD? And would we consider partnering with a commercial stage product?

Correct.

Yes. Look, on the first one, we absolutely would consider partnering a biologic in the space in and I think that’s really the long and the short of what Patrick was just talking about. We’re really agnostic to modality and our Arcutis treatment modality. Whether it's an oral, injectable, or a topical, we can work on any of those. So we’re evaluating that full landscape in terms of our business development efforts. In terms of partnering on something that’s already commercial stage in the marketplace, I wouldn’t say never, but it’s probably not the highest priority. We’ve built an exceptionally strong development organization at Arcutis across clinical and manufacturing. You think about nine successful Phase IIIs, six FDA approvals, and I think this team has proven time and again its ability to execute development programs and create shareholder value. Part of our thinking around business development is how we continue to leverage this very strong development engine that we’ve built. Partnering on commercial stage products is more leveraging the commercial organization that we have, but the commercial organization we have is pretty busy with launching all these various indications for ZORYVE. I’d say that’s probably a lower priority for us in terms of the business development and commercial stage products.

Okay. Great. And then another one here, staying on the BD topic, and this one is more about how we think about potential size constraints. So is there any limit in terms of size that we would consider? And then depending on the size, different considerations from financing strategy to support that?

Absolutely. So I think our core focus is on the balance sheet is based on ZORYVE's trajectory. We will, as I said, focus on our milestone of hitting cash flow breakeven in Q4 of this year. From more focus on our growth and expand, as Frank outlined today, and funding those activities. If you think about innovative business development, we have quite a bit of flexibility with our debt facility with SLR, and depending on the asset, the quantum and as Frank said, based on today’s stock price, we’ll think about the funding mechanisms that are optimal to our capital strategy and how to allocate them for BD.

Okay. Great. The next question here is going back to the recent launch of ZORYVE Foam 0.3 and scalp and body involvement in plaque psoriasis. The recent growth for the cream 0.3% was more muted compared to the foam. This is in quarter 3. Is this a result of plaque psoriasis switching to foam from cream? How do you see that dynamic playing out between the two products?

Yes. We've gotten this question on a number of occasions. I think it's very unlikely that a patient who is stable on the cream is going to switch to the foam. I certainly have heard of patients who have received prescriptions for both products, and there’s no reason why patients can’t — if you had a plaque on your elbow and a plaque on your scalp, maybe the doctor gives you both, although you can use the foam on the body and it works just the same as the cream. I think we continue to see growth in new prescriptions for the cream. I don't think that we get this question about cannibalization; I don't think there's any cannibalization going on because the cream is still growing. What I do think we're probably seeing is that for new patients who haven't been on ZORYVE yet, more patients now, especially psoriasis patients, are getting the foam. Those in some cases are patients maybe who might have gotten the cream in the past. It's also important to emphasize, and I’ve said this before, but from a shareholder standpoint, it really doesn't matter which SKU they get as long as they’re getting ZORYVE. The cost of goods sold is essentially the same across the products. The price is the same; the access is very similar. As long as total ZORYVE volume is growing, shareholders are benefiting from that growth. I think having both the cream and the foam has options in psoriasis and now having two different presentations for atopic dermatitis tailored for those patients and having the foam for seb derm — is just giving doctors more and more opportunities to use ZORYVE to treat their patients with inflammatory skin diseases.

Okay. And then we probably have time for just one more question here, and this final question will be on the incremental data generation opportunities that Patrick was referring to in the presentation earlier. The question is, for the data generation opportunities in your current indications, the patient figures indicated on the slide, are those incremental new patients that will be covered and add to the market opportunity? Or how do we think about that?

Yes. Another great question. In terms of incremental data generation, those are really patients that are already in our serviceable obtainable market. For example, the nail psoriasis patient population, we talked about 3 million to 5 million psoriasis patients having nail psoriasis; that is part of the already targeted psoriasis market that we talked about. What we do expect is that it will drive a differentially greater uptake in these subpopulations, particularly the really hard subpopulations. Nail psoriasis is one of the hardest things to treat. Even with a biologic, it often doesn't clear. Palmoplantar psoriasis is another form of plaque psoriasis that is often very difficult to treat. If we can generate very strong data on ZORYVE’s efficacy in those very tough-to-treat patient populations, you would expect to see even greater adoption of ZORYVE in those subsets of patients. That’s why we think that this incremental data generation is so important.