Q3 2022 Arcutis Biotherapeutics Inc Earnings Call

November 8, 2022

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

[music].

Okay.

Yeah.

Good day, and thank you for standing by and welcome to <unk> Biotherapeutics incorporated Q3 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

We'll then hear an automated message advising your hand is raised please be advised that today's conference is being recorded I would now like to hand over the conference to your first speaker today, Eric Mcintyre head of Investor Relations. Please go ahead.

Thank you, Chris and good afternoon, everyone and thank you for joining our <unk> first quarterly earnings call.

Carl we are Frank <unk>, President and CEO , Scott Burrows, Chief Financial Officer, and Loch Chief Commercial Officer, and Patrick Burnett, Chief Medical Officer.

During this call we will we will be making forward looking statements. These statements are subject to certain risks and uncertainties and our actual results may differ materially.

Thank you to review the risk factors discussed in our latest SEC filings. We will then go to Q&A. After our prepared remarks with that I'll hand, the call to Frank.

Thanks, Eric I'll, just add my thanks, as well for joining us for our very first earnings call today, we're going to be talking about our third quarter performance as well as providing some general updates to you all on our business and the progress that we've made so far this year.

So you should have access to the deck on our investor webpage I'm on slide five to start with we've been talking all year long about 2022 being a transformational year for our curious we've already delivered on a number of very important catalysts and we've got one very big one coming up just ahead of us.

If you look at the slide I think it's really remarkable everything that our organization has been able to accomplished just in the last three quarters and last three months excuse me last quarter.

Obviously first and foremost was the launch of <unk>, 3% cream for plaque psoriasis. This is a massive step forward for us in fulfilling our mission of helping patients and bring meaningful innovation to dermatology.

Launch continues to progress really well and momentum is building.

<unk> got the right team, we're confident we have the right strategy and we certainly know that we've got the right product profile into Reeves to engender approve all of that and then to seek out additional referral less indications as we as we've talked about for a separate dermatitis atopic dermatitis and scalp psoriasis and Ken is going to be talking a little bit more about.

At the launch in just a few minutes.

I wanted to take just a minute to talk about the very exciting access wins that we just announced about an hour ago. I think that this is a validation of our responsible pricing.

Strategy and is delivering on the broad high quality access that we've been talking about I want to emphasize these are fully executed agreements as well as actual coverage. This is not just a contract being signed but an actual coverage for our product for a major pbms and for a major health plan.

I'm going to talk a little bit more about that as well in his comments, but this continues to build on our launch momentum with differentiated coverage that has very high quality and ultimately it's going to be less burdensome for prescribers and patients.

I think we've made really good progress on building a sustainable leading medical dermatology company through the continued development of our pipeline and we're going to talk a little bit more about the <unk> acquisition earlier this quarter in just a minute and why we're excited about that acquisition.

And then Patrick can also walk us through some very exciting top line results in more detail from the Erector study and scalp and body psoriasis and I will have to say I do have to say I think physicians are.

Phenomenally excited about our foam products for both separate dermatitis as well as for scalp and we think that offers real innovation as well as some competitive installation for something like 40% of patients.

Psoriasis, who have scalp involvement as well as the February dermatitis population.

I think as everyone is very well aware, we've completed enrollment in both <unk> and in taking it to an atopic dermatitis, we're cleaning the data running the analysis right now and we look forward to sharing those data with you from both studies before the end of this year.

And then Scott is going to talk a little bit more about our financial position, but we're feeling very differentiated in the biotech space right now given the strength of our balance sheet on the back of the two financings that we accomplished in August both the equity deal and the debt deal and that gives us really the requisite funding for both the launch of <unk> as well as funding our.

Growing pipeline in immuno dermatology.

Turning to slide six and I think many of you have seen this before this is just our pipeline slide and I really just want to touch on this.

To recognize our continued progress across our various programs.

And continue to build for the long term by harnessing our unique topical formulation expertise as well as our deep dermatology clinical development expertise.

That's both innovations that are coming from our internal engine and Patrick is going to talk about a little bit more about the <unk>.

<unk> on our preclinical programs as well as through external innovation, such as the business development deal, we did with Lucentis for the CD 200, our asset.

On slide seven let me talk for just a couple of minutes about the descendants. This opportunity we really see this acquisition as being transformational for us as a company.

And really moves us significantly forward in our journey to become the preeminent immuno dermatology company.

Yes, I think most importantly, it's important to emphasize that we are really sticking to our knitting in terms of our our stated strategy is consistent with our priorities. This is a large market with very large unmet medical need still it's a biologically validated target and this looks like it potentially could be a best in class molecule as we said before we don't do me too products.

We don't consider ourselves just to be a topical company never have thought of ourselves that way over half of our medical commercial and manufacturing organizations already have experience in biologics and we will be leveraging that expertise to continued progress candidates, including dissenters through through the clinic and into commercialization.

And the defenses molecule is its really complementary in atopic dermatitis to the slim Alas.

And it enhances our ability to potentially offer treatment options across the spectrum of disease from mild to moderate in one hand too to severe at the opposite extreme and then finally, we were able to acquire the asset for a very modest upfront investment and minimal spend in the short term and so it doesn't have a significant impact on our <unk>.

Financial outlook going forward.

Folks are assets on the next slide and why we're so excited about this target.

As I said, we see a very large unmet need in atopic dermatitis in spite of all the recent progress that very large and rapidly growing market I think <unk> is a very good drug and you've got some newer options coming along.

As well, but even with those innovations less than half of patients are able to achieve the 75% improvement in their disease and so we see a real opportunity to continue to advance the standard of care.

Checkpoint agonism is a very exciting emerging strategy in immuno dermatology, it's really the opposite of the checkpoint inhibitors that many of you are probably familiar with from the oncology space. If you agonize, the checkpoints and the immune system, you reset overactive immune cells, so youre able to modulate overactive immune cell.

Without really immunosuppressant.

Earlier this year, we saw some data that was released by a competitor with a monoclonal antibody against <unk> 200 are.

We were very interested in that data I think it showed some really impressive efficacy in humans.

Probably one of the most remarkable things was the durable response.

With up to 12 weeks of efficacy even off drug after treatment had been ended.

And that was really what led us to get much more excited and greater conviction around Cds 200 are.

And so we launched an effort to find the CB 200, our asset.

Identify dissenters and were able to acquire what we are now referring to as <unk> to $2 34, which is a fusion protein against CD 200 are.

And we believe based on the data we've seen thus far I think our Q2 to 34 offers us a great opportunity for potential differentiation on efficacy or potentially on a better dosing regimen.

So some important points of differentiation.

So we look forward to updating you in the coming quarters as we progressed that program as well and with that I'm going to turn it over to Ken to talk a little bit more about that as a REIT launch alright. Thanks, Frank in following along at home we're on slide 10.

Thanks, Frank and since our approval at the end of July we've made strong and steady progress in driving uptake of <unk> and really changing the mindset of what a non steroidal topical agent can do for psoriasis patients in particular in next generation PD for that can break away from the pack and do what others couldn't powerful efficacy and tough to treat areas coupled to an incredible tolerability and safety.

Profile.

Firstly I'd like to know how quickly we were out of the gate with drug and channel post approval credit to the teams in manufacturing and commercial operations for making that happen I've been pleased with our commercial execution and leading indicators all continued to point upwards, whether they'd be talking about awareness on the physician and patient standpoint incentive prescribed and overall receptivity to our profile the feed.

Back on the field continues to be incredibly positive building goodwill with all of the patients being able to treat the date and that's the read is delivering on its promise and lastly, we've seen adoption not just from topical corticosteroids as anticipated, but also other categories and products, which will get into shortly.

We've now seen over 4000 prescriptions of <unk> since our mid August launch with some very healthy double digit growth over the last six weeks since our full field team has been out we're also making positive strides on the payer front securing our first major commercial payers win with the formulary inclusion on the top Pbms plus with large national Health plan. This is ultimately the true gating factor in the past.

Word meaningful growth inflection and gross to net improvement and where it can really judge what the longer term prospects as we can be.

Lastly, we continue to March toward a thoughtful and sustainable launch with the REIT that can sustain itself not simply through the early weeks of the psoriasis launch, but thinking about the three other potential launches in the next 24 to 36 months with the foam and creating formulations.

Moving to slide 11, we've seen some very nice week over week demand growth, particularly after the full availability of the reed to the key EMR prescribing systems used in higher volume dermatologist settings, as well as the deployment of the full sales team as you recall, we hired the team in waves and we're now running on all cylinders coming out of the holiday week in early September .

See strong and steady growth fueled by a continuing interest in the product and our ability to fully penetrate the dermatology community with our team and tactics the resultant demand and the shape of the uptake curve reflects a measured approach with respect to growing demand organically without the aid of temporary accelerates such as full buy downs vouchers or other offers but also should not generate lift.

Our stalling activity as these credits are programs that are withdrawn from the market and a new behavior has to be established.

To mention the impact on gross to net.

We're very confident that our demand trends will continue to accelerate in the next demand catalysts are the beginnings of commercial coverage, which will allow the increasing numbers of patients experienced the benefit of the REIT at the lowest out of pocket price of $25.

Moving to slide 12, I want to speak a little bit about the source of business for <unk>.

Currently we are seeing a healthy mix of approximately 55% of our patients are switching over from either a topical corticosteroid or steroid combination product, which is really a confirmatory signal here that we can and will penetrate that marketplace and actualize on the true opportunity in the topical derm setting.

Now that we're about two and half months in not expectedly were also beginning to see refill pick up still very early days, but we're very encouraged by this trend.

Lastly, there is a very interesting set of switching going on from other agents with they'll buy the MTA.

So looking at the approximately on slide 12 for an attempt.

10 patients that are coming from non sort of options.

Adoption of <unk> coming from first and foremost older non steroidal Asia purchased <unk> inhibitors and vitamin D. Analogs. This is expected as those agents are often entertaining not effective or both and represent compromises. One has to make post initial fair reviews, we do see a small trickle psoriasis biologics are agents likely being used in either.

<unk> or in lieu of that biologic, given where the patient is in their treatment journey.

We've also seen a healthy percentage come from other non steroidal competitors in the space, which is unsurprising given the order at launch, but also because of some of the challenges experienced there and lastly, Tesla, which we don't really see as a direct competitor given the typical profile of systemic patient, but we are seeing movement to add to in either in combination or switch to topical regimen completed.

In lieu of an oral treatment.

While we don't have great great ideas about exactly the severity of patients we're treating.

Notice, we know anecdotally no.

As the patients we've treated have been across the spectrum mild moderate and severe.

So let's move to the next slide which is slide 13 and of course, it's the only way to truly access all of these opportunities in patients is really with our pricing and access strategy.

Want to reiterate our goals with respect to access and coverage that are appropriate pricing philosophies with 19 Garner high quality access with fewer steps or prior authorizations as well as more rapid formulary adoption. These two will ultimately play hand in hand, and accelerating uptake in preserving gross to net as the tiny must cover that cost of medication is reduced as that shifts to third party.

Profitability, we've been also pleasantly surprised that roughly one in four patients have had open access. It's the reason it's early stages of launch and as we've been messaging for meaningful jump in that number will come with continued major formulary wins remember that these are independent decisions made by health plans to provide that coverage even in some cases ahead of the parent TV.

M contracts and results in formularies.

Now we've had some investor vessels voiced concern in the past about a responsive responsible pricing strategy would leave us disadvantaged frankly on access versus a higher price higher rebates playbook.

I think the announcement of our first major formulary coverage decisions incredibly exciting for us as we even for patients and also validating through our differential strategy now.

While the acres still drying on the most recent formulary wins were very much diligently working toward our with our new partners. So that we can articulate more detail in the near future about future wins.

Just some more details on what Frank started on is that we have now fully executed agreements and we have received favorable coverage decisions for the inclusion of the read on the formulary of the top benefit pharmacy benefit manager as well as a large national health plan.

Each formulary inclusion expected at the beginning of November .

An important distinction here is that these are not merely sign contracts, but truth formulary coverage.

Given the timing of our earnings call today, we thought it would be very important to share. This with you and we will be able to communicate more details about the quality of coverage very soon but I will say, we're very happy with the differentiated value attributed to Missouri from payers as it relates to reducing prescriber burden.

On the very next slide then let's get into some prescriber feedback so I am now on slide 14.

So at this point, it's a little too early the window to run for the entire field survey, but.

Quick pulse surveys suggest that.

The feedback is very good in terms of understanding current and future intent to prescribe.

The patient initiations month over month or nearly doubling in terms of position in pet and the feedback from the field from physicians, who have used the <unk> continues to be incredibly positive.

Closer highlighting the most often are about the profile.

Following.

Many have been very pleasantly surprised with the rapidity of effect, we saw in our trials only needing eight weeks to get to the endpoint to get to a 40% Iga success measure, but Patrick showed earlier this year that nearly every patient in the dermis study responded to our product and nearly 3% and four patients achieved a clinically meaningful response.

This is in contrast to prior experience with this particular MLA and has really opened a lot of lives as we solicited feedback.

We also see examples those are reasonably to punch above its weight at the more severe end and treat those tough.

Again for US we weren't that surprised we saw this in the clinical trials and when some when we breakout our Iga success by our body surface area, we actually had numerically higher efficacy rates.

At the higher end of severe severity spectrum of BSA.

Now of course, coupled us with a unique ability to treat intertriginous areas and remember that we're the only label topical agent with this and the indication statement. This will be continue to that will continue to be a major innovation point for us in treating patients with this type of disease again, we're the only agent here that has demonstrated efficacy. In addition to tolerability for these patients.

Also it's early meaningful response again coming from patient. It has been one of the largest complaints and that relief of itch is often the first sign to the patients that the drug is working even ahead of plan clearance.

Finally, we know how well tolerated the drug as from the clinical experience that we continue to hear consistent reports of this model in the field.

This continuous feedback loop will reinforce and really Trump at the safety profile around <unk> as more and more physicians trial and gain experience solidifying a key differentiation differentiation point for the product in the surpass psoriasis topical treatment landscape.

Moving to slide 15, my last slide here, we talked about back in March some of the critical success factors for launch an acknowledgment, obviously net sales realization will take a little bit more time, given the payer coverage decisions, but we have standard some of these metrics already but we're going to continue to focus on these three pillars are driving prescriber awareness and use the patient.

Experience and of course that broad high quality assets, which we have spoken to a lot about today.

We've seen a number of unique writers continued to accelerate here in launch with well over 1500 unique writers and certainly good reach from our sales team and well over 80% of the high value targets moving.

Milling around 9000 Hcp's in total.

<unk> seen some refills go up with the patients and also patient awareness rising and then lastly, just the piece about again high quality access that we've spoken about with today's wins, so with that I'm going to pass it over to Patrick for our clinical update.

Thanks, Ken I'm on slide 17, and I'm, just going to touch on some accomplishments and upcoming milestones for us, but first I just wanted to echo the remarkable list of accomplishments that we have here in the third quarter that Frank mentioned and I want to give credit to the entire team that was supporting our R&D efforts.

And touching on that top milestones the FDA approval of <unk>, Ken has already spoken about the progress of our launch but I think it's also important to note that dermatologists like myself, we've been waiting for this moment of meaningful innovation in the topical space for decades, and there is really a palpable excitement that can only continues to grow as patients and physicians garner experience.

With <unk> being out in the field and being at some of the medical meetings and hearing how this is changing dermatology I think you can feel a real shift in the field is very exciting to be part of that.

So moving on to what we've done in the third quarter, it's been a great quarter for our phone program as well in the third quarter, we released our topline phase III erector data.

In September I'm going to touch a little bit on giving more data out there than what we had just in the press release. In addition for phone we had the opportunity to present the stratum late breaker at the European Adv meeting.

<unk> is our phase III <unk> study and Andy Bravo did a fantastic job of being able to present. This for US <unk> got a really nice response and some great awareness for our data in February dermatitis for the for the foam product moving onto cream as you note we've completed enrollment in <unk> one.

And then taking them into these were done in August and I'll talk a little bit about the progress of these programs moving forward from here and finally, our dermis data were published in the journal of the American Medical Association. This reflects the hard work of our team and some of the fantastic investigators that we've worked with this builds upon the phase II publication in the New England Journal.

Medicine, and now to have our phase III studies published in Jama I think really highlights the importance of these trials to medicine as a whole given that these are really journals that move outside of dermatology as well as within dermatology. So we're very excited to have seen that.

So moving forward into the milestones that are ahead for us as mentioned, we completed enrollment in <unk>, one and then changing matures for these are ages six and above.

We plan to have top line data before the end of 2022 as Frank mentioned.

And in addition, another big milestones for us with regard to progressing our pipeline and we have <unk> five. So this is a program where we have developed a unique drug delivery technology that gets our JAK inhibitor topically to the base of the hair follicle. This is where the site of inflammation is located right now patients with alopecia area really.

I only have access to systemic options and so having a topical program.

Would really represents an advance for these patients. So we're going to move this into the clinic before the end of the year and we are hopeful that this will prove out.

Technology in the clinic will be able to move that program forward beyond that.

With regard to the February dermatitis program. The next step for US is to submit the NDA. Our team is feverishly working to get the NDA and Thats planned for quarter. One of 2023 and just to remind you that the review time on that will be a 10 month review similar to what we had for <unk> cream in psoriasis.

Marching our action date for <unk>, Canada, we expect to hear back from Health, Canada for around April 30 of next year that'll be important for us.

Tending beyond beyond just the U S and then coming back to the cream.

Topic dermatitis program or other data coming in ages two to five year olds from the integument Peds trial, we plan to have topline data in 2023. So as mentioned this is two to five year olds with the 0.05% cream.

And then we will advance off of that topline data and then take them and wanted to take you mentioned when we plan to submit an NDA for <unk> cream in ages six and above this is with the one 5% cream also in 2023.

So moving onto slide 18, again, just to give a little bit more data on our erector phase III studies and the results that we saw there here, we see a schematic of the study design, we enrolled aged 12 and above now we looked at a co primary endpoint of scalp and body Iga in this trial at week eight and so we had.

The population of at least moderate severity on the scalp, that's the scalp Iga and they had to have a mild severity on their body and thats for the body Iga and they had to have at least 10% of scalp involvement rose 432 subjects randomized two to one active versus vehicle. Just a reminder, that the foam is a highly related formulation twos.

<unk> cream.

And also is that the <unk>, 3% dose, which is the same one that we are with it tends to reap cream currently not to give the ending away right at the beginning but we met our primary endpoint to co primary endpoints of scalp and body Iga as well as all of our secondary endpoint in this trial. So we're really robust data set coming out of these 432 patients.

Moving on to Slide 19, you can see the one of the primary endpoints here of scalp Iga that scalp investigator global assessment.

We got two thirds of patients to scalp Iga success by week, eight which was the end of treatment, but kind of looking at the earlier responses and showing the rapidity of response, we see that a third of patients already at week, two where Iga success on the scalp and half the patients with just four weeks of treatment and importantly, many of these patients are actually getting all the way to an iga.

It is clear, which means they have no disease on their scalp, we got 40% of patients to a scalp iga of clear at week, eight which is a really remarkable success rate.

Moving on to slide 20, and the body Iga. So this was the same primary endpoint that we had in Germany, one in Germany and in fact, the results that we see now with the foam showed that the results are similar to the cream now even a little bit of an uptick on that week eight time point that we gauge results, we had about 40% of patients from <unk>, one and <unk> with the cream formulation.

Here were just about 47 percentage of patients.

And keep in mind that with these co primary endpoints of scalp and body. We're also treating intertriginous disease. This is a treatment that really covers the entire patient from the top of their scope all the way down to their toes intertriginous as well. So it's really has the potential to be a simplifying treatment for patients with psoriasis and that would make it quite a unique.

Product in the market if approved so moving on to slide 21.

<unk> highlighted the importance of itch in patients with psoriasis.

This is very true of patients with <unk> and even more so of patients with scalp involvement we know the scalp issues incredibly problematic for patients. It's bothersome, but it can also lead to hair loss in addressing the symptom hasnt really big impact on quality of life.

So the results of the Erector study its just another one showing the benefit of our flu in the last in itch. We've demonstrated this previously with psoriasis and also in February dermatitis on Slide 21, you can see that by the week eight endpoints.

<unk> on scalp edge again, focusing just on scalp edge here. We also assessed our whole body itch in this trial will show those results later in a full medical meeting.

<unk> had 67% of patients by week eight two success meeting they had a four point improvement.

What's required by the FDA for labeling of endpoints.

Endpoints, so and about a quarter of patients is already at week, two showing that same 25% level on that payment point a four point response. So again rapid response on edge and getting a high proportion of two thirds of patients to success by week eight turning now to safety on slide 22 for the <unk>.

Yes, what we're seeing with the <unk> phone program is a very similar tolerability profile to what we're familiar with from those re of cream studies.

We see overall AE rates were low and consistent with prior studies.

We had balanced subjects with.

With serious adverse events with <unk>, 7% in both active and vehicle and most importantly, and I've presented a lot of results.

You always seem to be coming back to this discontinued study drug due to adverse events I think that this is a really important metrics for overall tolerability and here you see this is balanced with only one 8% on <unk> and one 3% on vehicle.

It demonstrates again that patients in our studies are not discontinuing due to adverse events.

Really significant levels. So that's a very positive sign for overall tolerability.

Moving on to slide 23, the safety profile here, showing all treatment emergent adverse events greater than 2% in any group.

Is that really the only outlier compared to our previous data with psoriasis as COVID-19, which is coming in balanced between <unk>.

Two 8% and vehicle at two 6%.

The other three adverse events listed there were all listed as ADR and our psoriasis program, but interestingly, we had about 3% diarrhea in our psoriasis program with the cream formulation here that number is about the same but the vehicle is now coming in at two 6%. So that's an interesting observation just between the two of those.

Just a little bit more data than with February dermatitis. These data as I mentioned were presented at Milan at the European <unk> meeting Dr.

Dr. Andy Glaub Al just fantastic job presenting them just wanted to highlight a little bit of them appear because it really rounds out what we think is the opportunity for patients.

With February dermatitis.

A disease that has been.

Had almost no development ongoing in the past 20 years or 30 years and recruiting last phone at the same concentration as we studied for the scalp really showed some remarkable remarkable data so what we see.

On slide 24 is it 80% of patients achieved Iga success at week eight already.

Already 40% of patients got to Iga success at week, two kind of echoing the same pattern of an early response, a rapid response in patients even at earlier time points.

Over 50% of patients achieved Iga of clear at week eight so that means that these patients had no evidence of February dermatitis in their scalp at week eight when they completed treatment.

For the study some new data on slide 25 that we added in from that ABB presentation are just really touching on two key signs of the disease.

Along with the symptom of edge, they really round out some of the major impact of this on patients that is erythema as well as scaling and here, we're looking at achieving an erythema or scaling of euro. So again no scaling left on these patients.

And again really good numbers, so over 50% of patients achieved erythema of zero at week eight with an early response of almost a quarter of patients and similar results similar numbers for patients for scaling as well. So I think thats really kind of gives an idea of.

The strength of the data that we have in February dermatitis as I mentioned, we are moving forward with this.

NDA and we're looking to have that to the FDA in the first quarter of 2023.

So just one last slide for me on Slide 26, and this is about our upcoming readout for that and take human studies, we know that folks are really eager for the readout of this program and just wanted to touch on a couple of points. As you know we've completed recruitment we're very close to read out here. These are large studies 600 over 650 subjects in each.

<unk> and.

And just to remind everybody. This is ages six and above and this is with the one 5% cream being applied once daily.

And we powered these studies.

Size of the studies based on really two factors one is the size of the safety database required to really.

Provide safety.

Data for our submission.

But also we wanted to have very strong.

Statistical power on the primary endpoint so based on our 650 subjects, we have greater than 95% statistical power to determine the same difference between active and vehicle that we saw in our phase II trial and this gives us about 10 times as many patients in the active arm as we had in our phase two study and Thats really.

I think puts us in a in a very good position for this readout, probably overpowered for the primary endpoint, but gives us better power going down into our secondary endpoints, which can be important for us to be able to really get the broad label in mild to moderate atopic dermatitis that we're looking for.

So with that im going to turn it over to Scott to cover our financial results.

Thanks, Patrick.

A couple of very important and exciting financial milestones in the third quarter first with this re launch in August the quarter represents our first as a revenue generating company and second we were able to bolster our financial strength in the quarter by raising an additional $285 million on the back of the psoriasis approval, leaving us very well positioned to continue investing in support of both the relaunch.

And the continued progress of our pipeline.

Turning to the financial results for Q3 on page 28 of the slide deck net product revenues were $725000 for the quarter. The revenues were driven roughly equally from end customer demand in the quarter as well as you expected initial wholesaler inventory build.

Our gross to net discount rate in the quarter was high as expected given we are still working to secure payer reimbursement, but our discount rate was materially better than other recent branded topical launches given our differentiated pricing and access strategy.

Modest improvement in the gross to net discount rate in the fourth quarter, given the timing of our recently announced formulary coverage with continued progress on delivering more value prescript expected throughout 2023.

We also expect continued demand growth is the launch accelerates and more formulary coverage is added for us.

Cost of sales was approximately $270000 in the quarter, we paid a $7 $5 million milestone payment to astrazeneca in the quarter related to the FDA approval to leave this payment was capitalized and will be amortized straight line over 10 years to the cost of sales panel lines, so that amortization charge for Q3 Hasnt.

Our weighted impact on our cost of sales percentage in the quarter given the modest revenues. We continue to expect our cost of sales margin to be pharma like steady state inclusive of this amortization charge.

Research and development expenses were $70 million in the quarter, we incurred a $30 million upfront charge related to our acquisition of <unk> centers, which essentially accounts for all of the change in R&D expense on both a year over year and quarter over quarter basis.

Call that we paid about $16 million in cash pretty cintas and another roughly $13 million in <unk> shares.

Normalizing for the $30 million do you think this charge, we expect the R&D line to stabilize going forward.

The wind down in cost from our pivotal studies is counterbalanced by the ongoing cost of the pediatric atopic dermatitis study and the long term extension study.

The regulatory and manufacturing activities associated with the upcoming launches in new indications and the progression of our next set of topical and biologic pipeline opportunities.

SG&A expenses were $35 million for the quarter, increasing largely due to the higher commercialization expenses for the <unk> launch, including the hiring of the full sales force we.

We expect modest continued growth in SG&A as we continue to invest in the psoriasis launch and the upcoming additional launches.

Net loss per share was $1 89 for the quarter versus $1 14 for the corresponding quarter in 2021 <unk>.

The <unk> acquisition contributed 51 to this quarter's net loss per share.

Turning to our final slide on page 29, we provide key balance sheet and cash flow items. We continue to operate from a position of balance sheet strength with cash of approximately $480 million as of September 30.

Our cash flow used in operations for the quarter was approximately $68 million.

This does not include both the onetime cash payment of $60 million for incentives and a $7 $5 million milestone payment to astrazeneca as both of these items were classified as investing cash flows.

<unk> shares outstanding for the quarter were $57 million, which includes the newly issued shares from our August equity offering as well as the newly issued shares from the <unk> acquisition, our quarter ending shares outstanding were approximately $61 million, which may help you in modeling accurate go forward share count.

This concludes the financial update I will now turn the call back to Frank to wrap up our prepared remarks.

Okay. Scott so thank you for listening in prepared comments and I think we're going to now transition to a Q&A session equity earnings.

Okay, Chris can you open I'll answer your question.

Yes, Sir Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Ken Cacciatore from Cowen Your line is open.

Hey, guys real exciting time I know.

Major data coming up but I wanted to focus on those or re launch and some of Ken's comments, you really are taking a different approach here versus your competitor.

Ken hit on some points actually I wrote one of them down which was interesting, saying we're doing it without accelerates, which is a new term, but I think very descriptive, but maybe you guys could take some time and Ken review a little bit.

Of why it's so important youre, taking the strategy that you're taking why you are not being a bit more aggressive on sampling and buy downs and what does that mean in terms of your preservation of long term value and I guess, a corollary to that is as you approach. The strategy you talk about these nice contract wins can we can you try to contextualize it the value there.

You thought and these first contracts. So is it validation early if that strategy. So just wanted to hear a fuller articulation of your choices versus theirs. Thanks, so much.

Sure Ken Great questions I'll try to break that apart starting with the accelerated so I think there are many ways to fuel our growth.

Obviously organic demand is built on the backs of their clinical profile, but there are many things that one can do to enhance your show trends and we've seen that with other products out there whether they be.

Yes.

<unk> opportunity is very very low in the pocket.

Cash offer is things that are.

Don't really represent I think sort of the long term sustainable type of demand in Q1, and as I said at some point in time.

That will have a material impact to your gross to net than we've seen.

So we're kind of learning from the past we have seen some companies that have gotten deep into holes in sort of ultimately.

Six to visit the organization based on their inability to call their way out of these scenarios. So that was the.

The approach we're taking it is very different and I think obviously it remains to be seen but we're very confident in the sense that even without generating.

Got it.

Massive uptake at the beginning and sort of.

So the value proposition of our clinical profile was very clear and the decision to cover us both at the PGM and plan level.

They can see our competition our value our clinical profile and the approach, we're taking and so that I think we were rewarded for that so we did not necessarily have to take the traditional.

Generate volume at all costs, and then rebate massively out of a very high price. They try to secure access. So it is a different playbook, we're very happy that we're able to report today.

The output of that but it really just lessons learned there in terms of we don't necessarily have to take that route. The other thing that we think about is committed.

Kind of the sustainability of our of our pipeline in order to get to those other milestones or launches we have to be in a financially stable position. So this is something that we've thought about in terms of how do we do this methodically in a controlled manner.

Without again digging ourselves into a hole and putting ourselves kind of behind the eight ball on that front. So these are important factors, we think about it.

In terms of future losses, and sort of what not to do I think the last thing is what you will see us with some of these.

Tactics that are used to generate volume really on whether youre talking about in this category or others almost universally they are pulled back. So one of the frustrations illustration of the physicians that we heard very loud and clear was.

Bait and switch US please don't put out something and then have to walk that back and then ultimately our credibility with patients is on the line I think that's one of the key learnings that we really built on having as many dermatology clinicians in house as we do is that understanding of.

Don't put out something that then you have to pull back and we've seen other products or other companies that have these strange transitions when theyre trying to walk back certain things they put out in the market.

Which then causes disruption in web consists of non linear growth patterns right. So this is something that.

We're very conscious of it and we hope to continue to build on the momentum that we have today with respect to the payers and then seeing the value without necessarily adopting that classic Hyatt.

High price high rebate approach.

Thanks, so much to answer it.

Alright did I answer your question I Hope I did.

It was very comprehensive and congrats on all the progress.

Thank you.

Great next question please.

Chris are you there.

Hi.

The next question comes from the line of Seamus Fernandez from Guggenheim Securities. Your line is now open.

Oh, great. Thanks for the questions guys. So.

Just two quick questions just from an expectations perspective.

Wanted to just get a sense of.

As it relates to the data that have been presented so far.

And.

Data that were presented.

Your own presentation of the FDA as primary endpoint.

Wanted to clarify.

As we speak with investors some are kind of looking at the difference of one.

One or two point change rather than the one one or two point change with the two point differential.

As the primary endpoint and just wanted to make sure that that was clarified for investors.

In terms of what you guys saw in your phase II results and maybe even provide the slide to refer back to from your 2020 presentation.

Just because I think it's important that people have the right metrics.

In place.

Separately.

Just also wanted to.

Get a sense of.

What you guys actually think the data means.

For your potential too.

Perhaps more aggressively promote.

<unk> cream.

Adding into the potential approval of that product would you change anything related to your promotional strategy at all with regard to couponing and getting more aggressive.

With the experience that physicians are gaining with <unk> or are you happy.

The experience that they are gaining in psoriasis and just looking forward to the new indication and then just the last question.

Really congrats on the early formulary win here.

Can you just clarify is the competitor.

Product. The tomo also on formulary are you guys exclusively.

The the product.

Formulary win there and do you see additional formulary wins in the relative near term that could surprise to the upside. Thanks. So much.

There's a lot of questions okay.

Ill turn it over to Glenn talked about the way I will turn it over to Patrick to address your first question about <unk>.

Yes, sure happy to kind of make it very clear what the what the endpoints are there. So the primary endpoint for <unk>, one and taking them into entertainment Peds is Iga success, and so when we're enrolling mild and moderate patients.

Those patients need to have a two point improvement and get to clear or almost clear so clear almost clear means a zero or one mild and moderate on the Iga is two three.

Severe which we're not enrolling into these trials would be a four so that means that a patient who comes in at a mild needs to get to clear in order to meet that Iga success criteria. The other endpoint that you had mentioned, which does appear in much of our communication around this trial because it really is the easiest one to communicate that.

Patients because it's two step improvement and the doctors the two step improvement.

<unk> involved in the Iga success can sometimes be a little bit tricky for people to get their heads around whereas when you're talking to a patient or physician you say listen we're going to get the patient to clear almost clear. They know what that means clear means they don't have any disease that almost clear means they have very little and.

Perceptible disease, that's remaining on them, so just kind of coming back to our data.

We showed about 50% of patients between the point of 5% to one five in a phase II study getting too clear almost clear and around a 30% vehicle range on that endpoint for Iga success point of $5. One five were both around 37% to 38%.

And so the vehicle also their demonstrated a 22%.

Core Iga success. So it was that 15% difference between on the Iga success that we use to power our phase III studies, because our expectation and taking it wanted to take away is that we'll be able to demonstrate similar efficacy to what we've shown previously and just to confirm our expectation is not to somehow reduce that vehicle right. We think thats.

An important intrinsic part of our of our product so with that I'll turn it over to Ken to address the latter part of your questions. Yes, Sustainment is going to start here, so I'm going to try to tackle the question regarding kind of more aggressive promotion with respect to atopic dermatitis. So clearly.

We're learning organization and I think many things are up for grabs one thing I'd point you to though is obviously the temporary nature of our launches <unk> is a little bit farther out and we'd have to sort of understand the landscape with respect to coverage as you know with add on indications, sometimes youre able to kind of leverage.

The decisions made on earlier products in the portfolio and if that were the case you could certainly imagine a different approach.

Owing to the fact that we would have several.

Quarters under our belt with the center.

Earnings and being a different position to maintain kind of sustainability and so I think.

The short answer is it depends and I think we would reserve the right to kind of dial up and dial down.

The level of sort of the tactics and approaches we could take.

And it certainly I think the competitive intensity would have some india with that as well so I.

I can't tell you that we will or won't other than to say.

All things are on the table, but clearly the access picture and kind of where we are as an organization given the downstream launches would play a role in terms of how clinical and aggressively play that now.

Now with respect to the formulary only speak to US I think we're still working with our partners to sort of.

Get to the point, where we will fully disclose the details.

But I will say that once that comes out we will have a better picture of kind of the situation. We're in.

Look for those details soon but right now we're not we're not.

At the point, where we can sort of fully disclose the physicians only value we are covered.

Mmm.

Chris next question.

Thank you.

Our next question comes from the line.

Vikram <unk> from <unk>.

Morgan Stanley Your line is open.

Hi, good afternoon, thanks for taking our questions.

From our side both on the <unk> launch so far.

<unk>.

On inventory, what's the typical steady state of <unk>.

Inventory you would expect to have maintained preserved in the coming quarters and then secondly.

At this point of the launch do you feel like you've seen enough kind of patient experiencing at this point to understand how many tubes per year might be reasonable for people to kind of work through.

In annual basis. Thanks.

Sure Vikram Hi, Scott good to go.

On your question around the wholesaler inventory piece.

Noticeable I think I've mentioned in my prepared comments about half of the sales in the quarter were related to the build.

I think I would just say that we don't expect it to be a meaningfully a meaningful contributor when we expect the pickup in demand driven scripts to be the main portion of sales going forward.

You've probably seen from other companies wholesaler inventories do fluctuate, it's just hard to predict these things and so.

Be sure to call out win wholesaler inventory impacts the sales in the quarter.

But again.

Proportional we saw in Q3 was driven by the initial Buildout launch I'll hand, it off to Ken to talk about your second question.

Yes, so repo rates, it's still very early in launch and so I don't know that we have any confirmatory or.

Data suggest that we would back off of our earlier comments regarding the three to four tubes I think.

It's very early days the vast majority of patients that really only received their first tube and so.

In many cases, depending on the body surface area that took us two to three months. So it will take some time, what's encouraging is that we arent seeing refills again, that's always confirmatory feedback that the patient is having a positive experience they're seeing the efficacy they are looking for.

Those are good signs, but and we feel good about our guidance at the moment, so probably far too early to do.

And that assumption.

Fair enough. Thank you.

Yeah.

Thank you.

Our next question comes from the line of.

Louise Chen from Cantor your.

Your line is open.

Hi, Thanks for taking my questions and congratulations on a successful quarter and a few questions for you. So first one I had for you was that I know theres been a lot of focus on.

The initial launch prescriptions.

It's probably too early to draw any conclusions here on peak sales potential, but when do you think you'll actually hit your stride here and then second question I had for you is physician feedback on derive why do people like why are they prescribing at what drug today switching from and the last question I had was just on <unk>.

The <unk> one and two are you filing with that data are you going to wait for Pete. Thank you.

Sure.

So.

I think what we.

What we said earlier was we think that the momentum that we have coupled with the payer access coming into play it will really help be that inflection point.

I don't know exactly I don't know if youre asking me when.

We're hitting stride with Heraeus draglines, meaning like peak.

But I think that we're hitting on all cylinders at this point and clearly there's a few more theres still more work to do with respect to the payers. So.

Today is a great marker for us, but we've got many more wins.

Fully unlock the potential and really we really think that the reduction in prescriber burden is really one of the biggest piece.

SaaS and widespread adoption of our products. So until that work is done it was hard for me to say.

Sort of like hit on all cylinders that we're running at full speed quite yet on that so I think thats really the marker that you should then look to sort of see it we're executing fully.

With respect to the feedback on the drug I mean, I think I mentioned earlier Theres a lot of it a lot of positive feedback.

We've been out in the field quite a bit listening learning and I think earlier in my slides that I talked about the the products from which people are switching from so I think on slide 12 in the deck.

Can see.

There's a whole host of products.

And there again, the majority of which is what we would assume topical corticosteroids as sort of the goal I think of all of the products newer topical products are sort of gunning for that same type of corticosteroid market. But you are also seeing some of the both newer branded products as well as some of the alternatives to steroids like vitamin D.

Hauser inhibitors being displaced as well so there's a pretty healthy mix. There's no. One thing again, the overwhelming modality from which people are coming from is topical asaf spoke there right.

Patrick anything to add in terms of the feedback our royalty to be thinking about using yes, I mean, the only thing I would say just from our kind of discussions with <unk>.

Dermatologists and other health care providers right now is it is it we're hearing not from like a single type of patients. There is not really we're not seeing it being niche does like the intertriginous driver or something like that we're hearing broadly patients who are being.

Planned to be put over onto our biologic theyre, putting some patients on to this answer to read we're hearing a lot of patients switching over from topical corticosteroids and so I think that the breadth of the where those patients are coming from is really <unk>.

Supported is supportive of the clinical profile that we thought would that we saw.

Is strong enough to work on knees and elbows, but it also is able to be used on some of the more sensitive areas like the face and intertriginous.

That's something that is very differentiating, especially to the topical.

Asked majority opinions out there.

Yeah.

Okay Louise I'll take the third one as well, which is about our submission plan. So we're planning on reading out. The Hey, you didn't want to take them into studies I've mentioned those will come before the end of this year. Our plan is to make a supplemental NDA.

Two the cream for ages, six and above which will include just the data.

Sure.

Those agents and we will not be including the integument Peds trial, that's at a different dose of <unk> hundred five in ages two to five year old. So we would move through the submission and approval for ages six and above and then after gaining that initial approval then we would come back with another supplemental that would take the data from ages two to five and extend the <unk>.

<unk> Internet lower age group, that's our plan right now.

Yes.

Thank you.

And we'll go next door.

Our next question comes from the line of Chris <unk> from Goldman Sachs. Your line is open.

Hi, This is Steven on for Chris. Thank you for taking our questions. We have one on <unk> and then one on the upcoming atopic derm data.

And with the recent formulary and PBF win.

Can you just speak to the percentage of covered lives on a national basis.

Then for the independent studies.

The phase III studies are recruiting a slightly younger age than was studied in the phase II can you just remind us what went into that decision and.

How do you expect that to affect the ultimate outcome. Thank you.

Even though this is Kent.

We wont be speaking to covered lives today look for future announcements on that front with all the details once we work through with our partner.

So that's not something we're announcing at this moment, but hang tight on that one.

Yes, so with regard to the atopic dermatitis the difference in the agent in our Phase III study, we studied down to ages 12 and above this submission for and taking it wanted to take them into you in the upcoming data readout will be ages, six and above so.

And we don't really see this as a significant risk to the program when we've looked over other data from both.

PD four inhibition in atopic dermatitis topical treatments as well as systemic treatments, we're not really seeing how patients across these different age groups are responding differentially to therapies.

And in particular.

Treatment with PD four there is a lot of history, there that really gives us support that.

Anticipate the similar kind of effect, even going down into those younger age groups that were very confident about the consistency of our of our results and especially with this.

<unk> read out were only extending the age 12 and above down to fix it to Bob.

Got it thank you.

Thank you.

Okay.

Our next question.

Comes from the line of Y ear from Mizuho Group. Your line is open.

Hi, guys. Thanks for taking my question. So I guess my first question is.

I think you previously mentioned that depending on how quickly you can analyze the data youre not committed to.

Reading out.

Take one in Q at the same time just wondering if this is still true.

I guess my second question is.

Could you sort of help us understand why you wouldn't.

Decided not to submit I guess, the third data and the stratum data for the foam formulation at the same time.

Is it primarily just because of that.

The speed and analysis or is it something else because it seems like waiting a couple of months.

Better than maybe.

10 months.

Q3 2022 Arcutis Biotherapeutics Inc Earnings Call

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