Earnings Call Transcript - ARQT Q2 2024

Operator, Operator

Hello, and thank you for standing by. Welcome to Arcutis Biotherapeutics Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Latha Vairavan, Vice President, Finance and Investor Relations. You may begin.

Latha Vairavan, Vice President, Finance and Investor Relations

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

Frank Watanabe, President and CEO

Thanks, Latha, and thanks to everyone for joining us today. I am very excited to provide you with an update on the most recent quarter of our performance. So let me start off on Slide 5 of the deck. We have continued to see really strong performance since our last earnings call, and I continue to be delighted and very proud of the Arcutis team in our execution in the quarter and thrilled about the momentum that we're building toward the second half of the year. Once again, we saw strong growth during the quarter in our expanding ZORYVE portfolio as healthcare providers and patients see how ZORYVE cream and ZORYVE foam address real needs in the treatment of psoriasis and seborrheic dermatitis, respectively. Solid growth in prescriptions for both the cream and the foam, coupled with additional gross-to-net improvements during the quarter, drove strong revenue growth in the second quarter both year-over-year and compared to Q1 2024, with net revenues of $30.9 million, 56% of which was cream and 44% was foam. We've now generated more than 351,000 prescriptions for the cream and foam combined from over 14,000 unique prescribers to date as our product delivers positive clinical experience for healthcare professionals and their patients. We improved gross to net again this quarter, resulting in a blended GTN in the high 50s across both products for the second quarter, down from the low 60s last quarter. Looking forward for the remainder of the year, we believe we are well positioned for sustained revenue growth with continued momentum on the psoriasis and seb derm launches, and atopic dermatitis will be additive in the second half following the launch of that indication late in July. We are also excited about the recently signed deal with Kowa Pharmaceuticals to expand our promotion into the primary care and pediatric space, although we wouldn't expect to see meaningful revenue contribution from those efforts until 2025. We are delighted that we were able to favorably renegotiate the terms of our debt agreement with SLR, and David will provide more details on those terms later in the call. With that, let me turn it over to Todd to provide some further commentary around ZORYVE cream and foam launches in psoriasis, seb derm, and atopic dermatitis.

Todd Edwards, Chief Commercial Officer

Thank you, Frank. I'm extremely enthusiastic about the expansion of our commercial portfolio, the healthcare provider and patient response to both ZORYVE products, and the immense opportunities that lie ahead. We achieved $30.9 million in net product revenues for ZORYVE in the second quarter of 2024, reflecting 43% growth over Q1. This growth was driven by healthy prescription growth, substantial gross-to-net percentage improvement down into the high 50s, and the team's success in pulling through covered prescriptions as well as improving coverage for the foam. For the remainder of 2024, we expect continued prescription growth and some gross-to-net improvement, primarily for ZORYVE foam as gross-to-net discounts for ZORYVE cream have already reached our expected steady state in the 50% range. Moving to Slide 8, the ZORYVE portfolio performance is showing promising growth and strength, reaching for the first time close to 10,000 scripts in a week. This new high demonstrates the momentum we can continue to create for the ZORYVE portfolio. The portfolio had quarter-over-quarter volume growth of 42% over Q1. We expect continued build as we include atopic dermatitis beginning this quarter and we'll add a fourth indication in 2025 if approved by the FDA. The ZORYVE psoriasis TRx performance has continued to show strength, and these results demonstrate that we can sustain our growth in psoriasis. We see the steady trend line with 8% growth over Q1 '24, while ZORYVE foam experienced volume growth of 102% versus Q1 '24. We have coverage for ZORYVE 0.3% cream and foam from all three large PBMs and continue to make progress with formulary access and downstream plans. When we examine the percentage of prescriptions being covered by insurers, we see an encouraging trend in ZORYVE 0.3% cream with roughly four out of five prescriptions covered, and for ZORYVE foam, three out of four prescriptions are covered. This is very positive for the portfolio and contributes to the gross-to-net improvements we have shown. Most revenue growth will likely come from prescription demand growth in psoriasis, seb derm, and new demand in atopic dermatitis, as well as from the expansion of our prescriber universe.

Patrick Burnett, Chief Medical Officer

Thank you, Todd. Starting off on Slide 17, I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast, engaging the dermatology community in the clinic, and continuing to hit all of our timelines with regards to regulatory milestones. Echoing what you heard from Todd, I see HCP excitement around ZORYVE cream for atopic dermatitis continuing to grow as we release more data. Building on the foundation of their clinical experience with ZORYVE in psoriasis and seb derm, dermatology clinicians find ZORYVE's product profile to be well-suited for what they and their atopic dermatitis patients are looking for. We've already started looking to expand the indications also for ZORYVE foam, having recently filed another sNDA with the FDA for scalp and body psoriasis in July. If approved, this will represent our fourth indication for ZORYVE, and I'm going to give just a brief peek at why we're so excited to bring this indication to patients. Writing out this table, we looked at the submission of our sNDA for the treatment of mild-to-moderate AD in two-year-olds to five-year-olds, which is planned for Q1 2025. We're also looking forward to our expected IND filing for ARQ-234, our biologic CD200 receptor agonist for atopic dermatitis in 2025.

David Topper, Chief Financial Officer

Thanks, Patrick. I'm on Slide 21 showing financial results both year-over-year and quarter-over-quarter. As you've heard, our net product revenues for the quarter were $30.9 million, which is up 547% from Q2 of '23 and 43% from Q1 of this year. For the second quarter, our R&D expenses, including clinical research, medical affairs activities supporting ZORYVE, and manufacturing costs for pipeline candidates were $19.3 million, down from Q2 of 2023 due to continued decreases in the development costs of topical roflumilast programs and also down sequentially from Q1 of this year due to lower spend in our early-stage programs. SG&A expenses were $58.2 million for the second quarter versus $46 million in the same period last year, as we invested in both our current and future launches, including our field force. Our SG&A expenses were slightly higher quarter-over-quarter, primarily due to incremental stock comp expense incurred in connection with the retirement of a former executive. We believe we are investing appropriately in our product launches to support the ZORYVE growth trajectory while constantly looking for ways to achieve savings and efficiencies. On Slide 22, you can see we had cash and marketable securities of $363 million on our balance sheet as of June 30, translating to a cash burn in the quarter of $45 million. Our current capital, together with our product revenues, enables us to continue operating the business for the foreseeable future, including our continued investment in commercial launches. We do not envision a need to come back to the equity market to support our existing businesses. I'm now on Slide 23. This slide summarizes the key features of the recently signed amendment to our debt agreement with SLR. The management team, together with our board, took advantage of the opportunity to renegotiate our debt to provide Arcutis with considerably improved financial flexibility. The revised deal, effective at the start of October, provides many important improvements, including an extended maturity to 8/1/29, a decrease in the interest rate of 150 basis points, and the flexibility to repay up to $100 million in the fourth quarter this year, together with the ability to redraw that money anytime through the first half of 2026, saving us considerable interest expense. We have also deferred our 6.95% exit fee on the redrawn $100 million to the August 2029 maturity date and removed restrictions on asset purchases.

Frank Watanabe, President and CEO

Thanks, David. Our goal here is to make a positive and meaningful impact on the lives of people afflicted with chronic dermatologic diseases. With ZORYVE now launched in two indications, and the atopic dermatitis launch now underway, we are proud to help millions of medical dermatology patients while simultaneously creating additional shareholder value. We are confident that our strong performance in Q2 '24 portends strong and sustained growth for the rest of 2024 and beyond. And with that, we'll wrap it up and open up to Q&A.

Vikram Purohit, Analyst

Hi. Good afternoon. Thanks for taking our questions. We had two, first on ZORYVE, both for psoriasis and also for seb derm. We were just curious if you could comment on your latest findings on refill rates and your, I guess, most recent estimates for how many tubes or cans per year you think patients are going to be working through. And then secondly, I just wanted to get your sense on where you think steady-state gross-to-net, excuse me, could be for the foam product once that settles out over the coming quarters? Thanks.

Todd Edwards, Chief Commercial Officer

Yeah. Hi, Vikram. Yes, our refill rates are roughly around 38% of our total volume in psoriasis. With seb derm, we see something similar, although signals indicate that there will likely be a higher refill rate on seb derm eventually than for psoriasis. For an average patient, utilization per year for seb derm will likely be around two cans per year, while for psoriasis, it will be around two to three tubes per year. Regarding steady-state gross-to-net for foam, we've seen encouraging ramp relative to improvements in our gross-to-net for foams, especially with the line extensions of the three PBMs and anticipate being in that steady-state high 50s well into the end of this quarter, beginning the fourth quarter of this year.

Tyler Van Buren, Analyst

Hey, guys. Congratulations on another solid quarter and all the progress. I have two for you. The first one is just the prescriptions for the cream have made a nice week-over-week jump over the past two weeks. So I'm curious to understand if this is pull-through from the early atopic derm launch already, and if you believe this could be a new trend line moving forward? And then the second question is, considering the latest performance for the foam, do you believe that the foam and the cream will split overall ZORYVE sales pretty evenly in the long term, or will one of the products be substantially larger than the other?

Todd Edwards, Chief Commercial Officer

Thank you, Frank,I'm happy to take it. We are pleased with the recent week-over-week performance for the ZORYVE cream. With the launch of ZORYVE foam creating a portfolio of products, this has really resonated with providers, creating a halo effect on both products. We have expanded our field sales organization by roughly 40 representatives, which started to have a positive impact on our ZORYVE cream and psoriasis brand performance. Regarding the split on the business between psoriasis and foam, I anticipate we will see higher weekly TRx prescriptions in foam than we do in psoriasis because the market for foam is larger relative to seb derm, and there's no branded competition in that market. Many patients have been eager for innovative solutions, and we continue to receive positive feedback from the dermatology community and patients.

Seamus Fernandez, Analyst

Well, thanks very much and congrats on the quarter and all the progress. I have a couple of questions on the progression in AD and how we should think about it. One is, as Kowa comes on to expand the promotion of ZORYVE, can you help us understand some of the key impact points and how we should be thinking about the prospect of acceleration there? Secondly, just hoping to understand how you're thinking about the pediatric AD opportunity, since that's another sNDA file that will bring ZORYVE to a very important younger patient population. I'm interested to know how you're thinking about promotion in that setting and the importance of it as well.

Frank Watanabe, President and CEO

Yes, Seamus. So, Todd, could you address Kowa, and Patrick, maybe you could discuss the pediatric aspect?

Patrick Burnett, Chief Medical Officer

Sure. Thank you, Seamus, for the question. Regarding pediatric AD, the two-year-olds to five-year-olds represent about 10% of the AD patients in dermatology offices. The pediatric AD community is already involved in our launch, as we have approvals for children ages six to 11 and adolescents. The data for the younger age group is consistent with older ages, so we will build upon that engagement. For Kowa's promotion, we are pleased with the start of the AD launch and believe that key drivers for acceleration will include the integration of ZORYVE into electronic health records, which we are working to complete, as well as successful outreach partnerships with pharmacies to drive coverage scripts. We are confident that these efforts will lead to a very successful launch.

Todd Edwards, Chief Commercial Officer

Absolutely. We're excited about the partnership with Kowa. We expect them to start promoting in the field by the end of this quarter, but we do not expect a significant impact on ZORYVE growth from the primary care and pediatric piece until 2025. There will be an education process for these doctors, although Kowa has solid relationships in this space, and we believe in their ability to generate interest and sales effectively.