Good afternoon, everyone. Thanks again for being here at TD Cowen's 44th Annual Healthcare Conference. My name is Tyler Van Buren, a senior biotech analyst here at TD Cowen. For this next session, we have a fireside chat with Arcutis. It's my pleasure to introduce Frank Watanabe, CEO, and Frank, thanks very much for being here.
My pleasure. Always good to be here.
So before I get started, if you guys have questions, feel free to raise your hand so you can ask them during the session. But with that, let's go ahead and start with the latest, most exciting launch, ZORYVE foam. So, you guys put up, you know, obviously a great quarter with the cream, but wanted to start with the foam since prescriptions are taking off like a rocket ship, even though the SAs won't allow me to put that in the note.
Oh, that's right, yeah, yeah, vertical and not rocket ship.
I put that in the title, and then they edited it out. Not fun. But, can you just talk about the initial factors that contribute-- is contributing to the early uptake of the foam-
Sure
-and prescriptions?
Yeah. You know, honestly, I think the single most important driving factor in the uptake is the lack of innovation in the SebDerm space, right? It's been over 20 years since there's been a new treatment for seborrheic dermatitis, and the existing therapies left a lot to be desired. So there was a great deal of excitement and anticipation for something new, and I think, you know, you couple that with the strength of our data in seborrheic dermatitis and dermatologists, and a lot of patients were very excited and very much anticipating this launch.
Beyond that, I think that the fact that a lot of dermatologists already have experience with ZORYVE cream and know how, both how effective and how well-tolerated it is, that's made the selling message around the foam really easy because we're building on all that positive experience and momentum with the cream. And then I think the third is that the process for writing and fulfilling and getting reimbursement for ZORYVE foam is identical to the cream, and the dermatologists have all figured it out, right? So it's very much a plug-and-play sort of option for them. It just fits in their workflow versus with a new product, you're having to teach them the process and which pharmacy to send it to and all of the hoops they have to jump through.
I think all of those combined have really come together to deliver this really outstanding launch that we've seen.
Yeah. I remember early last year, right, with the cream from, like, kind of March to May, right, the, with the third PBM, there was a little hiccup there, that you guys have clearly far recovered from. So in terms of that and that process and coverage and getting scripts covered and written, you guys feel like, you're basically where you need to be now?
Yeah, I mean, I think there's always work to be done. But I think for ZORYVE cream and commercial patients, we're in a very good place in terms of reimbursement, and we're over 80% commercial coverage. We're seeing very good trends in terms of the percentage of prescriptions that are being covered, and that's being reflected in our gross nets. Folks may have seen, you know, we had a really nice improvement quarter-over-quarter in the fourth quarter. We're down in the low 60s or mid-60s now. And we anticipate that we'll hit a steady state by the end of the year, probably somewhere in the mid-50s, which I think is very doable given what we're seeing on the reimbursement front. And by the way, the foam has had a very accelerated rate of coverage, right?
Todd Edwards, our Chief Commercial Officer, mentioned on the quarterly call the other day, we're already seeing almost half of our foam scripts being reimbursed as well, 5 weeks into the launch, which, I mean, that's just unheard of in this day and age, right, to have reimbursement that fast. I think atopic dermatitis will see a similar kind of accelerated curve to reimbursement. The next wave for us really is going to be Medicare and Medicaid, and we're actively engaged in discussions right now with the Medicare Part D plans. And I say plans because there are multiple plans that manage Part D, and then also with the states for Medicaid coverage, and we expect to start seeing some government coverage coming online still this year.
For Medicare Part D, what percentage of your patients do you think they'll-
Well, it's only about a third of psoriasis patients have Medicare or Medicaid, but in the SebDerm and the atopic dermatitis markets, it's about half of all patients have government insurance. So those are really big, important opportunities for us, and, and folks may recall, you know, we made a strategic decision very early on that we wanted to target the Medicare and Medicaid business, and so we priced ZORYVE in such a way that we're optimally positioned to win Medicare and Medicaid business and to have it available reasonably easily for those patients as well.
With the foam, 50% of prescriptions being covered basically immediately, how do you expect that to progress throughout the end of the year? Maybe, I understand you can't guide a specific number, but do you expect it to catch up with the cream in terms of-
Yes. We would expect that the foam and the cream across indications will all have the same gross to net eventually. You know, when we negotiated the contracts with PBMs, it was for ZORYVE as a whole, and so we're not having to go back and renegotiate contracts with these additional indications and, and line extensions. It will take some time because, you know, we have all three PBMs now covering the foam, but about half of the plans are on the PBM formularies, and the other half are on downstream health plans like Aetna, Cigna, UnitedHealthcare. And so we've got to go now and negotiate with the downstream plans to get coverage as well, and that just takes a little time, but the foam will eventually catch up with the cream, and it'll happen, I think, reasonably quickly.
Okay. And, obviously, it'd be great if foam prescriptions continued going vertically, but I assume that's not gonna happen forever.
I mean, like a rocket ship at some point, right? The, you know, the trajectory starts to level off. I mean, I don't think it's gonna flatten, certainly, given the number of patients out there. But we do expect to see an attenuation in the rate of growth. I don't think you can take the first 5 weeks and extrapolate, you know, indefinitely. But having said that, you know, this is a very large market, right? There's about 4.5 million patients being actively treated for seborrheic dermatitis with a topical, about half those patients in the dermatology office with the lack of innovation in the dermatology space, and frankly, our lack of competition, there are no products being promoted other than ZORYVE foam for seborrheic dermatitis. We have such a good profile.
We think we're gonna get a pretty good chunk of this marketplace.
Scalp and body psoriasis filing in the second half.
Yep.
Can you talk about that indication and that opportunity relative to SebDerm?
Yeah, absolutely. Scalp involvement occurs in almost half of psoriasis patients. About 40% or so of psoriasis patients will have involvement in the scalp, and it's not pathologically any different than psoriasis anywhere else. It's just psoriasis on your head, right? So the issue really is just a matter of drug delivery. Having said that, there are not good options for scalp psoriasis either. You know, you basically have a bunch of different options that all contain topical steroids. And for all the reasons that doctors don't like using steroids anywhere else, they don't like using it on the scalp either. The other issue with a lot of the other options for scalp is the formulation. You know, the shampoos or solutions, they tend to run all over the place. They're messy.
Our foam is really optimally designed for use in the hair. I actually have some in my pocket if you would like to try it. I don't know if you've actually tried the foam before.
Why not?
So, this is actually a vehicle. There's no active in here, but it's identical to the real thing. So you can see, you know, it's a nice, stiff foam. Holds up until you touch it, and then it will break, and then, you know, the patient just takes their hair, and they part it, and they just rub it on their scalp like that, and they're done. Doesn't mess up your hair. You don't have to wash it out, so-
If there's a residue, I'm gonna tell people.
All right. It's optimally designed for use in the hair, but it also can be used on the body.
It's good, yeah.
Yeah.
Can't feel it anymore.
So, you know, what we expect. In our study, we did a co-primary of scalp and body, and so we expect to have the foam approved for scalp and body psoriasis.
Yeah
... and then the patient would just have one prescription if they had scalp.
No, it's great. Okay, so with scalp and body psoriasis, do you think that the initial uptake there could look like SebDerm? Like, do you think there's a bolus of patients, or are these patients slightly different from SebDerm?
I think it probably will be faster than the cream initial launch and maybe a little bit slower than the SebDerm launch, but somewhere in between. There hasn't been a lot of innovation in the space. There isn't really much competition. You know, there are a few other foams available, but, excuse me, they tend to be very expensive, difficult to obtain, and some of them just aren't... Like, one of them feels like Vaseline. You don't want to put Vaseline in your hair, right?
Yeah.
Unless you're looking for the Brylcreem look. So we think that the uptake will be quite good, and we aren't going to face the sort of competition that we saw in the cream, with the cream in the psoriasis space.
Okay, and for the foam, body psoriasis, so that's like other than your scalp, hair-bearing areas where there's-
You can, you can use it anywhere, right?
Okay.
There's no point in writing a script for the cream and the foam. Just give the patient one thing. The foam and the cream are identical, except that we put more water in the foam, and we put less oil in the foam. But other than that, it's the same ingredients, same concentration, and we actually showed in our phase III studies that the foam performs identical to the cream on the body. It outperforms on the scalp for reasons we don't fully understand yet, but, you know, the efficacy is comparable to the cream. So I think one patient would just get a script for the cream or the foam, depending on whether they had scalp involvement or not.
If a patient was using the foam for their body, would they be able to get the same mileage out of it as the cream?
Uh, yeah.
In terms of, like-
In terms of how long it lasts?
Yeah.
Yeah.
Surface area. Okay.
Yeah, yeah.
Approximately how long do you expect it to last?
You know, it depends on the patient and the disease. It really depends on how much of your body is involved, but for psoriasis patients, we estimate, based on looking at other topical usage for older drugs, it's probably around 2-3 tubes a year or 2-3 cans a year. It's probably somewhat less for SebDerm because SebDerm covers less of the body, and then for atopic dermatitis, it's probably gonna be more because atopic dermatitis tends to be more extensive, and so they just consume more of the product.
Okay. Any questions on the foam before we move to the cream? All right, so with the cream, getting back to, getting back to that, the last couple of quarters, you guys obviously had nice jumps, beat expectations in Q4. You've said, gross to net will reach steady state 50% by the end of the year or mid-50s%. What do you need to do to get there? What, what is left to get to that gross to net? Is it just these downstream plans that you're working on?
No, I think, you know, there's several levers that you've got to pull. You know, obviously, it's getting coverage, and we already have very good coverage on the cream. And then it's also making sure that the doctors and the pharmacies are doing what they need to do in order to get the reimbursement. I think a lot of the progress that we've made over the last several quarters has been around that pull-through piece, making sure that everything's being done properly. We have a dedicated team that works with offices and pharmacies to make sure that happens. And then, you know, we continue to fine-tune our co-pay assistance as well, and that's been a contributor.
But I think you pull all those three together, and that's what's gonna get us eventually down to our, our steady-state gross to net. Medicare and Medicaid will also probably contribute to that, and, you know, we do expect that our Medicare and Medicaid business will be quite profitable and, you know, roughly comparable to the commercial business, which is a little unusual, but that's because of our pricing.
What's the average co-pay with your program?
So if a patient's insurance covers it, it's 0 co-pay to the patient. If the insurance company doesn't cover it, it's between $35 and $75.
Okay, and in terms of just driving prescription growth through the end of the year, we'll get to 80 in a second with the cream. Obviously, that can help.
Yep.
But just within psoriasis, are you gonna be expanding the sales force, or you think you're gonna be able to do that with your existing sales force by just getting deeper into the practices that you're already in, or both?
Yeah, I- so I think for psoriasis, plaque psoriasis, and seborrheic dermatitis, we're right-sized in terms of our sales force, and we have good coverage already. Todd mentioned on the call the other day, we already have almost 11,000 prescribers out of our 13,000 writers. So the penetration's good. You know, you can always bump up frequency maybe a little bit, but I think that two drivers for growth are gonna be, one is the positive, continued positive experience clinically with the drug, right? You know, doctors who use the drug really like the drug, and so they tend to use more of it. Todd made reference, I think, on the call, in about 80% of physicians, we see this sort of steadily increasing utilization of the product.
And then I think the expansion in Medicare and Medicaid will be a really meaningful contributor to growth, as the year progresses as well.
Okay. If you did increase the sales force, it would be in anticipation of the AD launch or scalp and body psoriasis?
Ex- exactly.
- next year?
Yeah, yeah. We would expect to probably expand the sales force around the atopic dermatitis launch, and that's really just, you know, making sure that we maintain-
Mm-hmm
our share of voice as we now have three, and soon four different products that we're selling to the same customer.
How do you think about the initial trajectory of the AD launch relative to psoriasis or SebDerm?
Well, I think, again, I would expect it to be muted compared to SebDerm. SebDerm is a very unusual setup, right? A really big market with no competition.
Mm-hmm.
That just doesn't happen in this business very often. You know, atopic dermatitis is a very competitive marketplace, like psoriasis, and so I think, you know, it will be a knife fight. But, you know, we think we have a really compelling product profile. You know, it's been a while since they've had a non-steroidal that could be used in first-line therapy as opposed to some of the other agents that were more second-, third-line therapy. So, you know, we think we'll have good uptake, but I wouldn't expect the rocket ship-like uptake that we've seen with SebDerm.
Okay.
Sorry, I should mention, just back on your earlier point about growth. The other thing I think is worth mentioning is we have made a number of changes in our commercial organization over the last couple quarters, and I think we're already seeing the payoff in terms of that execution. You know, we brought in a new Chief Commercial Officer, Todd Edwards, and he's made a number of other changes, and I think that's another really important contributor to the growth that we've been seeing the last couple quarters, is the enhanced execution.
He's basically taken the learnings from the Incyte launches, right, and applied them?
Incyte and other experiences as well.
Yeah.
Yeah, you know, Todd's been in the dermatology space for a very long time, very well-established. Kent Taylor, who took over our sales force, similarly experienced. We brought in another leader from Sanofi who has been in the derm space for many, many years. So a really strong commercial team, and I think they're executing very, very well.
Okay. And July seventh, PDUFA for atopic dermatitis?
Yep, exactly.
Can you just reiterate where you are in the review process and your confidence in an approval on or by July seventh?
Well, we don't comment on ongoing regulatory reviews. We feel good about the August seventh date, or July seventh date, excuse me. You know, think about it, when the FDA reviews a drug, there are really three things they're looking for, right? One is, are they comfortable with the manufacturing? Well, they've approved ZORYVE now twice, right? So I don't think that's much risk. And then they're looking at efficacy and safety and tolerability. If you look at our phase III data, the efficacy is crystal clear. Very good efficacy, and there essentially are no safety or tolerability issues with this drug. So, you know, you can never say never, but this is a very low-risk supplemental NDA in my view.
Okay. And obviously, the cream already has coverage, but when it's a new indication, there's a few steps you have to take to get up to speed there, right?
Yeah, I think AD will probably track similarly to SebDerm.
Okay.
Right? We would expect that the PBMs view it as a line extension, so we would expect coverage, you know, almost immediately, if not immediately, from the PBMs, and then we'll need to negotiate with the, with the, the downstream plans. But, you know, if you look at the first approval we had with plaque psoriasis, it took us 12 months to get all three PBMs. The foam, we got all three PBMs on the first day, so, you know, that gives you some sense of the compression. And then, the downstream plans can't come on until the PBM comes on, so that would be accelerated, we would expect with the, the cream in AD as well.
Okay. So you have that bar graph in your deck, right, where you show the additional patients with each indication?
Yeah.
And then the primary care bar is very large.
It's very large, yeah.
When's that coming?
So we're actively engaged in discussions with potential partners in primary care. We won't do primary care ourselves. That's just a really good way of pissing away a lot of shareholder money. But you know, there definitely is interest, and so we'll progress those discussions. What we have said all along is that we would like to have the primary care partner sometime around the AD launch, and I say around because I don't think you necessarily need it at approval. You really have to win with the derms first, right? The primary care docs are not gonna move until they see the derms use it. So we've got to launch into derm, establish a foothold in derm, and then we can move into primary care.
So, you know, late in the year, you know, second half of the year, I think, is the right timeframe for that deal to start. If it happened earlier, that would be great, but I don't think we need it before then.
What would a PCP deal look like? How would that be structured economically?
Well, I mean, that's gonna be a subject of negotiation, right? I mean, I think you can do a fee for service. I'm not a big fan of fee for service, 'cause I don't think there's alignment of interests. Or you do some sort of a revenue or profit split, which, you know, is more straightforward. You know, one of the benefits of this particular situation is that they're different prescribers, right? We've got dermatology, they've got the other specialties, and we can see in the IQVIA data what we're generating versus what they're generating. I'm not gonna pay them for what I generate in dermatology, right? So I'll keep all of that, and then we'll split the non-derm business somehow to compensate them for their time and align interests, frankly.
Okay, just can you go over the existing cash runway, and whether you think that's enough to bridge you to profitability?
Well, we certainly feel a lot better after last week, thanks to Cowen and the rest of our banking syndicate. Yeah, so we ended last quarter just shy of $275 million on the balance sheet, and then we added another, let's say $200 million to the balance sheet in the last week. So, you know, we're very well capitalized, and we're generating revenue. You know, we have what we have said is that the cash that we had after the two transactions last week puts us well into 2026 for a cash runway. You know, I think if we continue to execute commercially, you know, we certainly see a path to profitability.
Yeah. On the expense side, which is kind of related to this, obviously, via runway, what are you guys doing in terms of R&D expenses, too?
Yeah. So, you know, some of this is just natural, right? Because we actually... This is unusual for a small company like ours. We ran nine phase 3 studies with roflumilast. You know, some of them, very large studies, and there was a lot of expense associated with that. Those are all winding down now. About the only thing left is the long-term atopic dermatitis trial. And so our R&D spend just naturally is coming down. But we also went through an exercise, late last year to really look at every penny we were investing everywhere in the company and say: What's the most important thing right now? And we did do some deprioritization of non-commercial facing activities, including R&D.
That's allowing us to largely offset the increased SG&A costs as we launch all these drugs by reducing R&D. I think our CFO mentioned last week we expect 2024 OPEX to be roughly the same as 2023. There might be a very slight increase, but largely we will be able to self-fund the SG&A increases through reduced R&D.
Okay. I guess to wrap up the cream and the foam discussion, how big do you think each of these products could be?
We haven't given guidance, per se, yet, but, I... You know, we had an Investor Day last year, and we shared some projections that we had internally. We think that SebDerm, AD, and psoriasis are each somewhere in the range of $0.75-$1.25 billion in peak sales. So, you know, this could be a multi-billion dollar product, I think, across all the indications. It's gonna take us a while to get there, obviously, particularly because we're having to change, you know, the practice of medicine and move dermatologists away from topical steroids. But, you know, we're confident that that will happen over time. So yeah, ultimately, we think something in that, you know, $2 billion-$3 billion range could be certainly achievable for peak sales.
I guess from a business development perspective, and strategics, you know, how many strategics are there that are out there, that are interested in these types of products, that you're having conversations with?
Well, those are two separate questions.
Okay.
You know, I mean, I think, from my standpoint, anyone who has a biologic, you know, ZORYVE would be a fairly natural tuck-in. I don't know how many of them are actually interested in watching us. You know, we do occasionally get indications that there are strategics sort of watching. You know, I think, you know, there haven't been any transactions for any of the newer topicals from strategics. I think some of that is they're probably watching to see what the trajectory looks like. In our case as well, you know, there's always a question of whether they want to step in front of regulatory risk, or whether they want to wait to approval.
But I think, you know, as the product continues to grow, I suspect the strategic interest will ramp significantly, 'cause there are just some natural synergies between having a biologic and having a topical. They don't compete with each other.
Right. Since we have a good amount of time left, maybe you could talk about the other assets you have in development.
Sure.
If you had to point people in the audience to one of them, which one would it be in the near term?
Well, honestly, nothing in the near term, I would say. But, I think the two most exciting ones are the two that we are actively investing in right now. So we have, in the clinic, we have a really novel topical JAK inhibitor. You know, folks, you're probably aware oral JAKs work quite well in alopecia areata. There have been three different failures of topical JAKs in alopecia areata, including one that works orally and it doesn't work topically, right? That, to me, looks like a drug delivery issue, and we know that the inflammation in alopecia areata is very deep, which is difficult to deliver drugs topically deep in the skin. You hit the capillaries, and the blood just sort of takes all the drug away.
The gentleman who was our founder and has been our chief technical officer until this Christmas, when he retired, invented a technology that allows us to actually deliver drug down the hair follicle, down to the bulb. So we believe we're gonna be able to get our JAK where it needs to be, and that could put us in a position to be the only topical for alopecia areata. We wouldn't be competing with CIBINQO or some of the other orals, but, you know, I think, again, would be complementary. But we're very excited about that program. We think there's a lot of potential there. And then, you know, the other one I think that's very exciting, we acquired a company out of the U.K. last year, called Ducentis, that has a very promising biologic for autoimmune disorders, that targets CD200R.
So, you know, folks are probably familiar with the checkpoint inhibitors in oncology. One of the newest areas in immune disorders are checkpoint agonists that do the opposite of the checkpoint inhibitors, right? If you agonize the checkpoints, you actually normalize activated immune cells. And in an autoimmune disorder, that's appealing because you could reduce the autoimmune process without immunosuppressing, right, and creating new side effects. I think the other interesting thing about the checkpoint inhibitors is they seem to have a checkpoint agonist, excuse me, a very long period of response, even off drug. Patients actually go into remission for some period of time, and, you know, I think we think that could be a really meaningful differentiator. So we're really excited about that program as well.
We're working on that, IND-enabling work right now, and hope to be in the clinic in the not too distant future. We'll update investors as that progresses, and then we have some earlier stage things. But I think those are the two most exciting pipeline programs we have right now.
Sorry, and on the topical JAK, when's the next update for that program?
So we're in the clinic. We're still enrolling, and when we complete enrollment, we'll give a specific guidance around when we will see data. But, you know, I would hope that maybe, you know, late this year or early next year we'll have some readout. It's important probably to caveat, that is a phase I study. You know, we are looking at some biomarkers, and we're doing biopsies, but we won't expect to see hair growth 'cause it's just too short, a period of time. But, we are treating patients in the phase I study. So we'll be able to hopefully get some useful data from that trial.
How long do you think you need to treat patients to get hair growth?
Probably six months, just by virtue of the hair growth cycle. It takes a long time. I know from personal experience, it takes a long time to grow hair.
Okay, and that technology you're referring to, it's formulation-based that allows it to get into the follicle?
Well, it's, yeah, it's formulation-based that delivers the drug down the hair follicle. The drug itself is a drug that we licensed from Jiangsu Hengrui in China. A very, very potent JAK1-specific JAK inhibitor. Orally, the data looks great. I think it's, you know, they've shown efficacy in UC, in atopic dermatitis, and rheumatoid arthritis, and we have a really good JAK inhibitor, and now we just need to get it to the right place, and we think our technology will allow us to do that.
Okay, great. Any questions before we wrap up? All right.
Sure.
So, so Frank, I'm gonna ask you in closing, what aspect of the Arcutis story do you feel is most underappreciated by investors right now?
Well, up until a couple of weeks ago, I would've said seborrheic dermatitis, but I think folks are, you know, now cottoning on to that. Hopefully they are. I think both atopic dermatitis and scalp psoriasis are also very significant opportunities, and I would argue they're really not baked in the stock price. I think there's a lot of upside for investors in the next 12 months. And hopefully with, you know, the excitement that everyone's seeing around the Sebderm launch, folks will have increased conviction on those other two indications, too.
Wonderful. Well, I'm pleased to report that I have no residue on my hand or my hair from the foam. But thank-
Glad to hear that!
Thank you very much for the time. It was great.
Your hair looks great. Good to see you.
Thank you.
Thank you.