Earnings Call Transcript - ARQT Q3 2023

Operator, Operator

Good day, and welcome to the Arcutis Biotherapeutics Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Eric McIntyre, Head of Investor Relations. Please go ahead.

Eric McIntyre, Head of Investor Relations

Thank you, Abigail. Good morning, everyone, and thank you for joining this morning to discuss our Q3 2023 financial results. The slides for today are available on the Investors section of our website. On the call this morning, we have Frank Watanabe, President and CEO; Todd Edwards, our Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and John Smither, Chief Financial Officer. I'd 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. With that, let me hand the call over to Frank. Frank?

Frank Watanabe, President and CEO

Thanks, Eric. I'm now on Slide 5 of the presentation. We are very pleased with the Arcutis team and our performance this quarter. We've made significant progress since our last discussion about Q2 earnings. The launch of ZORYVE for psoriasis is gaining momentum, and we have over 110,000 prescriptions and approximately 9,000 unique prescribers so far, as our product shows positive clinical results for healthcare providers and their patients. This favorable momentum positions us well for launching future topical roflumilast formulations. We've also seen significant improvements in our gross net, averaging in the low 70s. We executed flawlessly against our clinical and regulatory milestones, with a steady stream of successes this past quarter. Patrick will provide more details shortly, but during the quarter, we received FDA approval for an expanded psoriasis indication for children down to the age of six. We've filed a supplemental NDA for atopic dermatitis for the same age range, with an expected approval in early Q3 of 2024. We announced positive pivotal Phase III data for atopic dermatitis in children aged 2 to 5 and shared exciting long-term data that shows efficacy continues and even improves with long-term treatment with ZORYVE, lasting up to 52 weeks, along with favorable long-term safety and consistent disease control. We also bolstered our capital position with a follow-on raise we completed in October, along with an upfront payment from the out-licensing deal we executed in Huadong for Greater China and Southeast Asia. John will provide additional details shortly, including updates on positive changes in our SLR debt agreement that we've recently finalized. We anticipate expanding our intellectual property portfolio with a new formulation patent received in October, which is already listed in the Orange Book. We also have several pending applications that we expect will be issued soon, further enhancing our patent protection. Moving to Slide 6, we are very enthusiastic about 2024, as we are on the brink of a major expansion of opportunities for topical roflumilast, which will significantly accelerate our revenue trajectory. Over the next 12 months, we aim to expand the total addressable market for ZORYVE potentially ten-fold, increasing our patient base in the U.S. from about 1.3 million commercial psoriasis patients today to over 13 million as we add around 1.2 million commercial patients with seborrheic dermatitis and about 1.4 million commercial patients with atopic dermatitis treated by dermatologists after the expected approvals for these indications. We could also potentially add another 3 million patients within these same indications who are covered by Medicare or Medicaid and treated by dermatologists. We've noted some questions regarding the pace of transition from topical steroids to the newer non-steroid medications. We discussed similar markets back in Q1 that had established generic standards of care and the gradual conversion to newer drug classes over time. The topical dermatology market is progressing according to these earlier examples, showing roughly 5% conversion after one year. We remain hopeful that the topical market will continue to transition and eventually achieve about 50% conversion. I am also pleased to welcome Todd Edwards as our new Chief Commercial Officer, whose experience in the topical dermatology market will enhance our commercial execution. Under Todd's leadership, we have a solid plan to further accelerate ZORYVE's growth, and we are investing in our commercial operations to support that growth. Now, I'll pass it over to Todd to share more about the ZORYVE psoriasis launch.

Todd Edwards, Chief Commercial Officer

Thanks, Frank. I'm very enthusiastic about joining the Arcutis team and looking forward to the tremendous opportunity ahead. It is great to be speaking with all of you today to provide a brief commercial update. Moving to Slide 8. The ZORYVE psoriasis launch continues to progress nicely, and we have specific plans to further accelerate the launch trajectory, laying a solid foundation for sustained growth in psoriasis and further growth in new indications. As I come on board, I see healthy, steady ZORYVE demand that was driven by the strength of the clinical profile. After spending the last several weeks in meetings with dermatologists, MVs, and PAs currently using ZORYVE, the feedback I received about the product is exceptional. These prescribers spoke to me about the patients being delighted by the results achieved with ZORYVE. The NRx and TRx prescription volume is growing every quarter, and ZORYVE has over 100,000 prescriptions launched to date. We are starting to see a preference for ZORYVE relative to non-steroidal competitors, and 8 in 10 ZORYVE writers are increasing their utilization of ZORYVE. The new pediatric label expansion down to six years of age incrementally expands our opportunities for growth and further strengthens ZORYVE's safety and tolerability profile. We expect demand growth as we capitalize on our investments in the launch and strengthen our field execution. One very large incremental opportunity to accelerate prescription growth is expansion into Medicaid and Medicare beginning in early 2024. Roughly a third of psoriasis patients and nearly half of Seb Derm atopic dermatitis patients are on Medicare or Medicaid. ZORYVE's pricing falls below the CMS specialty threshold, unlike other branded topicals, so we are much better positioned to access these patient segments. I am now on Slide 9. ZORYVE's differentiated pricing and access strategy continues to resonate with payers, with over 130 million commercial lives covered, 90% without a prior authorization. It was great to see that the Arcutis team had secured coverage with all three large PBMs in the U.S. within 12 months of the launch. Most recently, Express Scripts modified the criteria for ZORYVE coverage, removing the double-step edit for patients who have intertriginous plaques in recognition of ZORYVE's unique indication for treating these patients. We anticipate further improvements in ZORYVE commercial coverage as we go into 2024 as well as accelerated commercial coverage for the foam at launch, with two of the top three PBMs expected to cover the product at approval as a line extension. We will continue to build upon the improvements seen in gross to net for Q3 and Q4 and expect that progress to continue in subsequent quarters, with us approaching our target gross to net for the psoriasis indication by the second half of 2024. From my experience, I am confident in the opportunity to improve gross to net with derm products. We are already seeing very encouraging trends in the percentage of prescriptions being covered by insurers, with a clear opportunity to expand on this by enhancing our collaboration with contracted pharmacy partners to ensure willingness to improve coverage rates. I'm now on Slide 10. The team has been focused on three pillars of commercial success for sustaining ZORYVE growth. Firstly, driving healthcare provider awareness and use. The prescriber base is growing steadily, with now about 9,000 unique prescribers since launch. We just completed a 15% increase in field force size, focused on high-volume geographies. The field team will drive broad efficacy messaging to move physicians along the adoption curve from initial trial in specific regions of the body to expanded use for patients who have psoriasis plaques across their larger body surface area. Secondly, patient engagement, as refills continue to be an important driver of long-term growth. The number of refills in the third quarter increased by 50% versus the second quarter, which continues to be encouraging and in-line with what we want and expect to see given the positive experience patients have with ZORYVE. As mentioned, we also went live in September with a targeted DTC campaign to drive further branded requests. Finally, the broad high-quality access in both commercial and incremental Medicare and Medicaid coverage creates the opportunity for more patients to experience ZORYVE. We are also looking forward to upcoming launches and new indications. I'll hand it over to Patrick to cover that.

Patrick Burnett, Chief Medical Officer

Thank you, Todd. I'm now on Slide 12. As Frank highlighted, it's been a very busy quarter, and I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast to the dermatology community and meeting all our timelines regarding regulatory milestones. Starting with psoriasis first, we announced the approval for use down to the age of six. This expands our current indication and overall opportunity in pediatrics, and we look forward to including five-year-olds in psoriasis, which will be the subject of a future FDA review pending some additional data. Moving on to Seb Derm, this will be the first indication for the foam, and we have an upcoming PDUFA on December 16, with a launch planned for early 2024. There's a lot of enthusiasm among physicians for Seb Derm, driven by our unprecedented efficacy with this once-a-day foam in an area that hasn't seen innovation in decades and has no branded competition, all in a market as large as psoriasis. Now, looking at Slide 13, I want to highlight a few points on the efficacy in Seb Derm. On the left, 80% of patients achieved IGA success, meaning they reached clear or almost clear on the IGA scale in eight weeks, starting from a baseline of moderate or severe. What's generating a lot of excitement is on the right, where we show that 50% of patients were completely clear, meaning they had no erythema, no scaling, and no evidence of disease. Additionally, we observed improvement in itch within as little as 48 hours after starting treatment, which is crucial since itch is the primary symptom of Seb Derm and greatly affects quality of life. Moving to Slide 14, patient surveys highlight the significant negative impact of Seb Derm on daily life, with over three in four patients expressing anxiety about their disease and over 90% stating it negatively affects their social lives. Healthcare professionals have also conveyed that they feel they're failing their patients because patients keep returning, but they have nothing to offer beyond the same topical steroids and antifungals previously used. We recently presented quality of life data at the AMCP Conference, demonstrating the meaningful benefits roflumilast foam has in improving patient quality of life, measured by the Dermatology Life Quality Index, or DLQI. On Slide 15, I see positive dynamics for rapid adoption of Seb Derm due to significant pent-up demand for this novel non-steroidal foam, primarily because of the lack of brand competition and innovation, coupled with higher patient dissatisfaction compared to psoriasis. Many patients are on impractical treatment regimens involving topical corticosteroids and antifungals with significant limitations. We also have the opportunity to leverage the positive feedback from psoriasis prescribers to expand the ZORYVE prescriber base. As Todd mentioned, the benefits of accelerated commercial coverage for the foam and its approval will enhance healthcare provider confidence in prescribing. Finally, regarding atopic dermatitis, we submitted a supplemental NDA for use down to the age of six, with an expected approval in early Q3 2024. In September, we also released positive psycho-socio-dermatological data for patients ages two to five. On Slide 16, we're highlighting our recent release of very encouraging long-term data in atopic dermatitis. The demonstrated efficacy continues to improve with long-term use, meaning four weeks in the pivotal trial followed by an additional 52 weeks for a total of 56 weeks. We observe EASI-75, a clinically relevant endpoint, where the proportion of respondents increases from approximately 43% at week four to about 66% of patients achieving a 75% improvement by the end of treatment. This is particularly exciting as patients experience increased benefits over time and improved disease control. Notably, we achieved this control with a less frequent maintenance regimen, where patients switched to a twice-weekly treatment if they were completely clear. I'm very pleased with this response, as it aligns well with clinical practice and has been very well received by dermatologists. I'm enthusiastic about the clinical profile of roflumilast cream and its significant opportunity in this large, growing market, with favorable dynamics for rapid adoption, showing similar positive trends as Seb Derm. Specifically, in pediatric patients, there's a greater likelihood of adopting non-steroidals compared to psoriasis, largely driven by patients' desire to avoid topical steroids. With that, I'll hand it over to John.

John Smither, Chief Financial Officer

Thank you, Patrick. Good morning, everybody. I'm beginning on Slide 18. For the third quarter, we reported net product revenue of $8.1 million, reflecting a 70% growth quarter-over-quarter on top of the about 70% growth in Q2. This was largely driven by substantial gross to net percentage improvements down to the lower 70s, particularly with the CVS coverage win and the team's execution to ensure prescriptions are covered by insurers. We also saw healthy demand growth in the quarter. Looking forward to Q4, we expect further ZORYVE demand growth and gross to net improvement versus Q3. On Slide 19, I'll walk you through the rest of the P&L. We reported total revenues of $38 million for the quarter, which included, in other revenues, the upfront payment we received from Huadong collaboration and license agreement. R&D expenses of $26.2 million were down significantly from Q3 2022 due to the upfront milestone payment for the Ducentis acquisition, as well as continued decrease of development costs of topical roflumilast programs. We expect Q4 R&D to be on par with Q3 and expect fiscal-year 2024 R&D expenses to decline versus fiscal-year 2023. SG&A is a result of higher commercialization expense year-over-year, which reflects our continued investment in the ZORYVE launch and upcoming launches in Seb Derm and atopic dermatitis. As Todd mentioned, our additional sales force will drive modest incremental SG&A growth in Q4 versus Q3. Lastly, net loss per share of $0.73 improved by over $1.15 per share year-over-year. Moving on to Slide 20. On the balance sheet, cash and marketable securities stood at $228 million as of the end of the quarter, which obviously does not include the recent raise of $100 million that we completed in early October. That raise provides a path to expand our psoriasis launch, as well as capitalize on the significant expansion in market opportunity for topical roflumilast into Seb Derm and AD. We also recently undertook a reorganization to resize all non-commercial efforts to align with R&D prioritization. You can expect us to continue to refine and sharpen our efforts around cash burn as we make continued progress on expanding ZORYVE in all indications. The net proceeds of the capital raised recently in October, plus our existing cash, plus what we believe to be our forecasted revenue provides runway into 2025. We also remain confident in progressing an out-license deal in Japan, potentially by the end of '23 to bring in additional non-dilutive capital, which would further extend our runway. I also want to provide some important updates on our amended loan terms, which we recently agreed to with our lender SLR. As many of you are aware, on the existing $200 million we have on the balance sheet that we've drawn down, there were two, in particular, financial covenants in place, a market cap covenant and a revenue covenant. I'm glad to report that the market cap covenant has been removed and has been replaced with a capital covenant, wherein the company has to obtain $31 million by the end of Q1 2024, which could largely come from an upfront payment that I just mentioned around the Japanese out-license. The revenue covenant has been modified, requiring us to achieve at least 75% of our agreed-upon product revenue forecast, which replaces the previous minimum net product revenue table. For year-end 2023, this has the effect of reducing the $30 million trailing revenue requirement to below $25 million. Finally, the final loan tranche of $25 million has been eliminated. We appreciate SLR's continued partnership and are delighted with these changes and feel they provide the company with significant operating flexibility going forward. With that, I will hand back to Frank for some closing comments, and then we will open for Q&A.

Frank Watanabe, President and CEO

Thanks, John. As John mentioned, we continue to evaluate all our activities as we transition from a development stage to a commercial stage company in order to effectively manage our expenses. Back in Q1, we announced a de-prioritization of a number of our R&D programs. Based on those changes and as our ongoing large Phase III trials are winding down, earlier this quarter, we completed a limited restructuring to better align our organization with our ongoing activities. Today, with the expected approval of roflumilast foam and the successful submission of the AD sNDA, we are announcing some further changes in our leadership to align our organization with our priorities. Patricia Turney will be stepping down as our Senior Vice President of Operations, and David Osborne will be retiring as our Chief Technical Officer. Both Patricia and David will continue on as consultants to the company to facilitate this organizational transition and lend their extensive expertise in the future. We will be merging our technical operations and product development organizations, and Bethany Dudek has been promoted to the role of Chief Technical Officer, overseeing the range of these activities. We're excited to have Bethany taking over our technical operations. She's been with Arcutis for the past three years as the Head of Quality and has done an outstanding job. I would add, I've worked with Bethany off and on for the past 15 years. She's an outstanding executive, and I feel very confident about her. She brings to her new position extensive experience across product development and quality and manufacturing built over a 28-year career at Arcutis, Kite, Novartis, and Amgen. With the ongoing ZORYVE launch and all the additional opportunities ahead of us, I believe we are incredibly well positioned to execute on our mission of building the preeminent immunodermatology company and continuing to build shareholder value. With that, we'll open it up for Q&A.

Operator, Operator

Thank you. At this time, we'll conduct the question-and-answer session. Our first question comes from Tyler Van Buren with TD Cowen. Your line is open.

Tyler Van Buren, Analyst

Congratulations on all the progress during the quarter. I have a couple for you related to Seb Derm. For the potential topical roflumilast approval for Seb Derm, can you elaborate on where you are with the regulatory review and if you've started labeling discussions? The second question, just regarding the launch trajectory and the coverage relative to ZORYVE. I think you mentioned that two of the three major PBMs expect to approve it as a line extension. Does that happen immediately upon approval? Or what's the timeframe on logistics? How long do you think it will take to get the third PBM online?

Frank Watanabe, President and CEO

Yes, Tyler, great to hear from you. With regard to Seb Derm, as a policy, we don't comment on ongoing reviews with the FDA. So I don't feel it would be appropriate for me to make any comments on the process. I will say that I think we feel very confident about the upcoming PDUFA date. The data speaks for itself. With regard to the coverage, I think I'd ask Todd to respond to that one, if you could clarify around the first two and then our timing on the third.

Todd Edwards, Chief Commercial Officer

Yes, absolutely, Frank. Thank you. Regarding the contracts and Seb Derm, as mentioned, the two of the large PBMs within our contracts today, the Seb Derm launch will be treated as a line extension. What that translates to is that we're starting this launch at a position of strength, meaning that at launch, those two PBMs will cover Seb Derm as a covered product. This will help us also with a strong start to our gross to net. The third PBM, we are currently in negotiations with, and those negotiations are very positive right now. So we look to further those conversations with the ambition of having coverage at launch with that third PBM.

Eric McIntyre, Head of Investor Relations

Thanks. Abigail, we can go to the next question.

Operator, Operator

Our next question comes from Seamus Fernandez with Guggenheim Securities. Your line is open.

Seamus Fernandez, Analyst

So maybe just as a first discussion point. Would you mind comparing and contrasting the launch of ZORYVE and where you are in the launch relative to the impact of the vitiligo launch for the brands that you used to work with? I think it's an important and interesting comparison relative to the coverage dynamics as well as the opportunity for warehousing and accelerated growth. Just trying to get a relative sense of where you feel awareness is as a comparison and what this could mean for the overall brand because unique indications really do seem to accelerate brands overall. Also, if you can provide us a little bit of color on how you see the extension of coverage impacting gross to net—should we be thinking about overall gross to net having a step down or even a slight movement down in the fourth quarter to accommodate that case? And then just a question for John. Can you clarify the 75% revenue target? Is that just for this year, or is it sequential targets laid out for the future?

Frank Watanabe, President and CEO

Seamus, it's always good to hear from you. So just to clarify, you are asking Todd about ZORYVE and the dynamics between psoriasis and Seb Derm and how that compares to OPZELURA and the dynamics with atopic dermatitis and vitiligo?

Seamus Fernandez, Analyst

Yes, I just didn't name the product.

Frank Watanabe, President and CEO

That's okay. I can say that. Go ahead, Todd.

Todd Edwards, Chief Commercial Officer

Yes. Great. Thank you. So first thing relative to the Seb Derm launch. We are currently working on some disease state awareness activities for both patients and dermatologists that's targeted education, likely focused prelaunch. The emphasis is on the frustration of the condition, the impact on quality of life, as well as the polypharmacy that occurs here. We're talking about five to six treatments per patient, and often, it takes 15 to 30 minutes a day spent with this regimen. This creates a very frustrating situation for patients. There have been no innovation branded products in this space for over two decades. If you consider the number of available patients in the patient pool, there is a ready pool of patients yearning for a product like ZORYVE that provides a unique value proposition. This product can be used once a day, it's one product versus polypharmacy and delivers long-term disease control. There are about 10 million patients diagnosed with seborrheic dermatitis. About 7 million are treated within Rx, and if you break that down, about 4 million are treated within Rx in derm settings, and about 3.2 million are treated with the topical corticosteroids. Dropping into our treatment zone, about 2.2 million of those are moderate to severe patients currently taking topical corticosteroids. So, there's significant opportunity here to really bring ZORYVE to life. Furthermore, we’re starting from a position of strength with this formulary position where two of the three PBMs will cover us as a line extension at launch. You asked the question about gross to net, so we expect that with the Seb Derm launch, we are not starting from ground zero, launching a new asset into the market where you have to provide a free goods program that is going to have an adverse impact on your gross to net. We will have coverage with the two PBMs, those will be reimbursed claims and a positive gross to net. So the gross to net for Seb Derm at launch will be higher relative to the gross to net that we have in psoriasis. However, we believe that the gap will rapidly close over time in 2024 as we bring on that third PBM coverage and maximize our covered claims.

Frank Watanabe, President and CEO

John?

John Smither, Chief Financial Officer

Seamus, this is John. To answer your question on the covenants, the 75% applies to the year-end number for 2023 or the year plan number. It's a monthly calculation in 2024 with a six-month lagging average. So, whatever that number is, you apply 75%. If we're above it, we're good. That's measured each month in 2024.

Operator, Operator

Our next question comes from Vikram Purohit with Morgan Stanley. Your line is open.

Vikram Purohit, Analyst

We had two. First, on ZORYVE psoriasis specifically. Could you unpack for us in a bit more detail, what drove the quarter-to-quarter gross to net change from Q2 to Q3? And then specifically, what needs to happen from here on out to compress gross to net? From where it is now to steady state, which I think you mentioned would be in the second half of next year? Secondly, on seborrheic dermatitis, apologies if you mentioned this in response to a previous question, and I missed it, but how do you think the actual uptake in script trajectory for Seb Derm for the initial couple of quarters could compare to what we saw with ZORYVE for psoriasis post the launch of that product?

Frank Watanabe, President and CEO

Yes. I think those probably are both for Todd.

Todd Edwards, Chief Commercial Officer

Yes, absolutely. Let me first cover off on relative to the gross to net and what drove the change in gross to net, and what we need to continue to do to amplify improvement. We saw an improvement in coverage, as we saw in Q2, obviously accelerated in Q3. We noticed an improvement in the percentage of covered prescriptions across all the major PBMs in Q3, with CVS driving the most dramatic improvement. There was also improvement across the other two large PBMs. If you think about it, if this translates into reduced co-pay expenses and provides us a springboard to continue to improve gross to net and leverage this progress further. We expect our field force execution to be a continued focus on pulling through our coverage to produce approved gross to net in Q4 and beyond. We are developing partnerships with dermatology pharmacies, reinforcing our conviction to achieve our target gross to net. Regarding uptake for Seb Derm compared to psoriasis, as mentioned, there is a ready pool of patients that are searching for new treatment options. There is no branded competition within the market, and no innovation for over two decades, so I would anticipate a robust uptake at launch compared to the highly competitive psoriasis market, which has multiple competing products.

Frank Watanabe, President and CEO

And Vikram, I'd just remind you. To Todd's point, we picked up that CVS coverage 7:1, right at the beginning of Q3. This was certainly a major contributor to the improvements in gross to net.

Operator, Operator

Our next question comes from Uy Ear with Mizuho. Your line is open.

Uy Ear, Analyst

Congrats on the good quarter and all the progress. I guess the question is for Todd. You've been there for a little while now and I’m just wondering, what are some of the changes that are different that you're looking into executing? I know that you've already added some sales force, increased the sales force size. What are some other changes that you might put in place to improve script uptakes for psoriasis and maybe as well as for the Seb Derm upcoming launch?

Todd Edwards, Chief Commercial Officer

Yes, absolutely. Just a few things. After many years in dermatology, I see a tremendous opportunity to change the treatment paradigm in these three largest disease areas that we've been talking about here today, including psoriasis, Seb Derm, and atopic dermatitis. If you think about it, the dermatology communities have been yearning for non-steroidal options that still fit with their so-called topical first mentality; derms are oriented towards the local treatment. The ZORYVE data package, especially the long-term data on PsO, Seb Derm, or AD is exceptional, in my view, and it really hits the outcomes that dermatologists and patients are looking for. I see a ready opportunity to advance our competitive share of voice with our messaging, which, of course, are known levers that can drive utilization within the dermatology community. In addition to that, if you look at the perceptions of efficacy, they're very encouraging, and ZORYVE's differentiating attributes resonate with prescribers. As mentioned, the long-term data is extremely meaningful and differentiates that long-term value of ZORYVE. Dermatologists are creatures of habit, and it takes time to get them to a critical mass of patients that foam ZORYVE is placed within the treatment paradigm. By creating depth within our current prescriber base, moving them along the adoption curve, and increasing the average number of ZORYVE patients per prescriber, we will continue to accelerate the uptake in ZORYVE. As mentioned, we've hired additional representatives to amplify our share of voice. In September, we launched a targeted direct-to-consumer campaign, and we will continue to move forward with that. We’re also expanding on the efficacy message to dermatologists to include a broader target patient with a higher BSA. Additionally, the exceptional opportunity for expansion within Medicare and Medicaid, coupled with the expanded pediatric indication down to age six, will provide us with further expansion opportunities in psoriasis.

Frank Watanabe, President and CEO

Maybe I'll just add, because Todd is modest. We ran a very extensive search for our new Chief Commercial Officer. It was very clear to me that Todd was the right person to join this team. I believe that leadership matters, and we chose Todd because he has a proven track record. He's done this before, successfully launched other topical products in the space, and very effectively driven demand while managing gross to nets successfully. I have complete confidence in him and his ability to lead our commercial team. We also announced the promotion of Ayisha Jeter to head both marketing and market access. She had been previously serving as interim Chief Commercial Officer and had been running market access. Along with Todd, I have real confidence in their ability to launch these additional indications and continue to drive the growth of ZORYVE in psoriasis.

Uy Ear, Analyst

Can I follow up with just a question on gross to net? If your target is to reach steady state sometime in the second half of next year, it implies that the quarterly pace improvement is pretty significant. Can you sort of talk a bit, perhaps help us quantify what the improvement could be in the fourth quarter, at least?

Frank Watanabe, President and CEO

I'm thinking about it. We tend not to give forward guidance on gross to net. I would say we saw a very significant improvement in Q3 over Q2. We saw a nice improvement in Q2 over Q1. I think we will see a further improvement in Q4 versus Q3. I won't commit that it will be of a similar magnitude as what we saw in Q3 because that was a pretty big move. However, I think in Q4, you may see a little bit of noise in Q1 with the co-pay resets, but we'll continue to make progress there in Q2 next year as well. I think it's not a miraculous improvement for us to get to our target gross to net with continued execution against the programs we already have in place and the coverage we have in place.

Operator, Operator

Our next question comes from Chris Shibutani with Goldman Sachs. Your line is open.

Chris Shibutani, Analyst

On the commercialization effort, can you give us a sense for how maybe more specifically, the composition of this group might be able to be impactful? Also, what's the appropriate way to think about the timing for a potential inflection from that? Frank, I think you've historically acknowledged how AD as a market is vast, and into the potential primary care market would contemplate a partnership for that market specifically. Can you talk about what your latest thinking is there?

Frank Watanabe, President and CEO

Yes, sure. Maybe I'll take the second question first, and then I'll ask Todd to talk about the sales force. You are absolutely correct, Shibu, regarding our previous comments about half of the atopic dermatitis market and also about half of the seborrheic dermatitis market existing outside of dermatology. A lesser portion of the psoriasis market exists outside of dermatology. The challenge for the primary care and pediatrics markets, where most of those patients sit, is the breadth of the prescriber base. We are targeting 250,000 prescribers versus 13,000 prescribers, which is not economically viable for a company like ours to build a primary care sales force. We have been saying all along that our intention was to find a partner with an existing primary care sales force that could co-promote for us in those markets. That continues to be our plan. At this point, we are in active discussions with potential partners to try and strike an agreement. We have said that from a timing standpoint, ideally, we want to have that partnership in place around the atopic dermatitis approval. I say around because the PCPs will look to the dermatologists for guidance. We have to win with the dermatologist first. I don't think we need that PCP partnership in place at launch, but we'd like to have it shortly after that launch—there wouldn't be any downside to having it before either, right? So I think you should really be thinking about us hoping to have that in place in the second half of 2024. Todd, do you want to talk a little bit about the sales force expansion?

Todd Edwards, Chief Commercial Officer

Yes, relative to the sales force expansion, the 15% increase in share of voice—the 15% we took that and overlaid over the current sales force. We focused on high-prescribing geographies to ensure that we achieve the intended frequency and reach with the high-prescribing physicians. We've carefully designed this 15% expansion in those geographies. As we move through 2024 and in the atopic dermatitis launch, we will consider potentially another expansion to ensure we have the share of voice required to engage across the three indications. Also, do not forget, in 2023, Arcutis aligned a group called the Pharmacy Access Managers within the field. This team engages directly with independent pharmacies as well as the dermatology offices to ensure that we achieve appropriate prescription fulfillment. I feel that the organization is well-positioned right now to have the necessary share of voice that we need to continue the acceleration of ZORYVE psoriasis and ensure we start from a position of strength with the Seb Derm launch.

Frank Watanabe, President and CEO

That expansion was completed on October 1. So I think we will see some impact in Q4, and that will continue into '24.

Todd Edwards, Chief Commercial Officer

Yes, absolutely.

Operator, Operator

Our next question comes from Sean Kim with JonesTrading. Your line is open.

Sean Kim, Analyst

Congratulations on the quarter. I guess just a few quick questions on my end. The first question is as you look to moving to government, Medicare, Medicaid patient populations, can you comment on the potential additional operational efforts and financial burden that will be required to tap into that market and the potential sales opportunities there? My second question is about the sales force expansion as you look to launch Seb Derm and also atopic dermatitis. I believe you mentioned about 9,000 unique prescribers that have prescribed ZORYVE so far. I wanted to hear your thoughts on the opportunities to expand the number of prescriptions per prescriber and the potential expansion to reach the target of 13,000 that you mentioned last time around? My last question is about the SLR loan agreement—the modifications to the financial covenant. I just want to make sure that I understand correctly that the original threshold or minimum threshold remains for the years 2025 and 2026.

Frank Watanabe, President and CEO

Great. Maybe let me take your second question, and then I'll have Todd address your first question, and John address your third question. Yes, regarding our breadth and depth, we have targeted about 13,000 prescribers. They represent over 90% of the relevant prescriptions in dermatology. Out of this 13,000, about 9,000 are currently writing. There is clearly an opportunity to expand our prescribing base. We might not reach all 13,000, as some doctors are ultra-conservative and are never going to change from topical steroids. However, I think we'll eventually achieve a very high penetration. We've been adding approximately 500 doctors a month to that base. We were at 7,000 in the last quarter, so we will continue to expand. I am confident about that. I think the foam can help broaden the prescriber base. Todd, would you like to talk about the potential lift when getting into Medicare and Medicaid, both financially and operationally?

Todd Edwards, Chief Commercial Officer

Yes, Medicare and Medicaid—there are approximately 3 million patients in play. For Seb Derm, it's more on the Medicare side, and atopic dermatitis on the Medicaid side. We have been engaging in the Medicaid space to secure coverage for patients in 2024 in preparation for the atopic dermatitis launch. In addition, we are in conversations with the big three PBMs regarding their Part D plans in Medicare, with the ambition to secure that coverage in the first half of 2024. What’s very important to note, especially regarding Medicare, is our repricing strategy—given that our price point is below the CMS specialty tier, we will likely gain this coverage in Medicare with minimal impact on our gross to net. So we're actively engaged, and those conversations are progressing.

John Smither, Chief Financial Officer

Let me address the SLR covenant. The way it works is if you were to look at it today, there's a table with specific revenue targets that prior to the amendment we were held to regarding the loan agreement. That has been replaced with an agreement around a plan, which we do every year as a matter of course. There is an agreement and approval of that plan by our Board and SLR. Whatever that plan is, you apply this 75%, and if we are above 75%, we have met the covenant. That is how it mechanically works.

Operator, Operator

Thank you. That concludes the question-and-answer session. At this time, I would like to turn the call back to Frank Watanabe for closing remarks.

Frank Watanabe, President and CEO

I appreciate everyone making the time to call into our earnings call this quarter, and we look forward to talking to you all in another quarter with an update on further progress at Arcutis. Thanks again.

Operator, Operator

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