Okay.
Mic's on. There we go. Good morning, everyone. Welcome again to day two of TD Cowen's 45th Annual Healthcare Conference. My name's Tyler Van Buren, Senior Biotech Analyst at TD Cowen. For our next session, very excited to have a hybrid presentation and Q&A with Arcutis. And it's my pleasure to introduce David Topper, the CFO, and Patrick Burnett, the Chief Medical Officer of Arcutis. Patrick and David, it's a privilege to have you both here. Thank you very much for joining me.
Thanks for having us.
I'll go ahead and hand it over to you to kick off the presentation.
Great. Thanks, Tyler. Yeah, we're really excited to be here, talk to you a little bit about where we are at Arcutis. We just, you know, it's nice to start out the year with a very strong fourth quarter. We had a really strong fourth quarter. I think that that came from a couple of different trends that we're seeing in the business. We expect these to fully continue and to make 2025 also very strong. First of all, you know, as you know, if you know the company, we've had a series of launches, and we've been able to really build a very strong portfolio for ZORYVE. I'm going to talk about that a little bit in a minute.
Our most recent launch is in atopic dermatitis, which is a very large patient population and fits very nicely overlaying with the healthcare providers that we're already talking to for ZORYVE for our existing indications that were seborrheic dermatitis and psoriasis. In addition, around the middle of last year, we increased our sales force from about 90 to 140. We feel that that really gives us just the right engagement for those key targets across the U.S. We're talking about dermatologists primarily, a smattering of allergists, and also a lot of nurse practitioners and PAs who are writing a large percentage of the prescriptions taking care of dermatology patients and are embedded within dermatology offices primarily.
Again, I'm going to talk a little bit about the portfolio, but I think one of the truly unique aspects about Arcutis and ZORYVE is that we've been able to build this related brand that really covers all of the major inflammatory diseases that are coming into a dermatology office. One of the things that may not be quite so visible, but certainly has been a huge focus of effort for us at the company, is to continue to improve the execution on our commercial team, especially in the sales force, and just ensuring that we are improving every single day with how it is that we're engaging with healthcare providers and making sure that the message for what ZORYVE can bring to patients and to those providers is being made clear.
I think that that's also something that we anticipate to increase as we move into 2025. We had a lot of turnover at the company as we looked to find just the right talent. I think we have a fantastic team right now, and we're seeing the results from that, and that's only going to continue to improve. This slide kind of lays out our portfolio for ZORYVE right now. Plaque psoriasis was our first indication, seborrheic dermatitis, and that was for the 0.3% cream. Seborrheic dermatitis was our next approval. That really brought a completely new concept to the market, which is a once-daily non-steroidal foam in an indication, seborrheic dermatitis, that had not had a new mechanism of action in several decades. It really changed the treatment landscape for seborrheic dermatitis patients. I think everybody has been very pleased with the uptake for foam.
I think the important part for us as we expand this portfolio is that our next approval is within that foam product. Now we're going to be adding scalp psoriasis. We conducted a trial that looked at co-primary endpoints for scalp, investigator global assessment, and body. What we saw was that we get exactly the same efficacy when we use the foam as the cream, which already has a very strong position within psoriasis. The foam allows us to treat the disease no matter where it appears in the patient. It can be the scalp, knees, elbows, the genitals. It's a once-daily treatment. This has never been seen before in dermatology for this patient population. As I mentioned, atopic dermatitis was our most recent launch.
You can see from the size of the market, 26 million atopic dermatitis patients out there. This is a very large segment of dermatology inflammatory disease. It has a little bit more noise within that market. There are some other products that are non-steroidals that are being marketed to patients with atopic dermatitis. I think the profile that we have with a very strong safety, very rapid response with regard to itch and signs and symptoms, very good tolerability, that's been a hallmark for challenging the treatment of atopic dermatitis patients, is being able to get a quick response and also to have no stinging and burning with a topical non-steroidal. I think one of the reasons that we really, truly benefit as a portfolio is that the access, the brand name is consistent across all of these different products.
A healthcare provider having a positive experience with seborrheic dermatitis or psoriasis immediately plays into their thinking as they're about to prescribe for an atopic dermatitis patient. I think that one of the kind of aspects you'll hear us talk a lot about is kind of really looking to become that preferred brand for dermatologists for managing their chronic inflammatory diseases in the clinic. David?
Thanks, Patrick. As you heard, we had a very, very strong fourth quarter. We reported total revenues for the quarter of $71.4 million. Of that, $69.4 million were actual product revenues. The other $2 million was a milestone payment. Start with $69 million. The other adjustment that I would make for anyone who's building models or thinking about projections is I would take out the non-recurring adjustment we made for product returns of about $4.1 million. That takes you down to $65 million and change. That's still in excess of 50% growth from the previous quarter, which we feel really good about. As Patrick said, I think that's just still barely scratching the surface the way we sort of look at the total addressable market. We had just under $167 million of revenues for the full year.
Just to do the math for people, that 65 and change means we were at a $250 million run rate at the end of the year for what we estimate is about a 3% market share when you add up the steroidals, topicals, and the non-steroidal topicals, branded ones, about a 3% market share. At that rate, really, even if you only got to 15-20% of the market share, it is a very, very large product. We feel like there's a lot of room to go. Total OpEx of about $306 million. OpEx will be higher than that in the first quarter. I do not think R&D is going to change much, but SG&A will go up a bit. We did have some anomalous items in the fourth quarter, some expenses that were rolled forward to the first quarter, a few working capital items.
You need to annualize the cost of the sales force that Patrick described to you, sales force increase. It will go up. We stand by what we've said before, which is that we will be at cash flow break-even on an annualized basis in 2026. That does not mean that SG&A will not go up a bit in the first quarter. It will, but we will get to break-even. I've talked about the market shares. We see the total addressable market as being about 17 or so million patients. It's very, very big. Most of those are converts, if you will, from steroids. There is a lot of room to go. This is a buildup of that patient population, starting with the commercial patients, those commercially insured for all the indications, including pediatrics, which we're seeking approval for and should get later in the year.
We've got Medicaid, where we've made a lot of progress. We basically today have about one out of every two Medicaid patients. When you look at the states where we've been approved already, we've done what most people do, which is go after the high population states first. We'll go after the next 35 or so states next. That is a very large population. We will go after Medicare as well. I would say that the Inflation Reduction Act has thrown a little bit of a monkey wrench into that whole mechanism there. They've been pretty distracted, but we believe we will be in that program in 2025. As I think everyone knows, we did strike a partnership with Kowa, who's marketing our whole suite of products to PCPs and pediatricians.
That, again, is a very, very large market in excess of 8 million patients, we think. That's a longer selling cycle. They started in late September. We've never thought that their contribution would be significant until 2025. There was a non-zero contribution in 2024, but it was not a significant number. We still believe in 2025 they'll make a meaningful contribution. We've committed that when that does happen, we will give all of you, all of the market, some data so you have a sense of volume and commissions and so forth. That's a 17 million patient population.
Yeah. As we look at where these patients are coming from for ZORYVE, one of the reasons that we're so optimistic about being able to continue the growth that we've seen in the fourth quarter is by looking at where the patients are right now for topical treatment of these three conditions: plaque psoriasis, seb derm, and atopic dermatitis. I think that you can see that with very little differences between the two of them, notably, you have some antifungal use in seb derm and a little bit of topical calcineurin inhibitor use in atopic dermatitis. The vast majority of these patients are on topical steroids, which have been kind of a mainstay for about 50 years. I think that was primarily driven by the fact that there were no non-steroidal options that were really strong competitors for steroids. Steroids work relatively quickly.
They have a reasonable efficacy. It makes them a good acute treatment for these diseases. The problem is that you're trying to manage a chronic disease with an acute treatment. That leads to a lot of cycling on and off and makes them, in particular, very ill-suited for the treatment of atopic dermatitis, where patients have flares that can be quite devastating and kind of set them back months and months of effort trying to get their disease under control. One of the things that we really are focusing on is being able to increase the access so that we are just as easy to prescribe as a topical steroid, understanding that utilization management criteria are going to require a step-through for topical steroids. Almost every single patient that walks into a derm office with one of these three conditions has had one steroid prescribed previously.
What is it that the next option they're looking for to manage their disease chronically? We're really seeing a big difference, a change within the dermatology community. It's driven not just by ZORYVE, but also by the fact that there's been kind of a renaissance of non-steroidal topical treatments in dermatology. I think we're all benefiting from this, which is that just like when the biologics came into dermatology and it was no longer acceptable to write prescriptions for cyclosporin or immune suppressors that were better suited for a solid organ transplant, it's also not really acceptable anymore to write steroid prescriptions to manage a psoriasis patient for 25 years. We know that that causes bone fracture. There's a tremendous amount of education that's going on from the podium and a lot of response from healthcare providers that are at these meetings.
We were just at, this is now kind of the busy season. We have AAD coming next week. There are sessions specifically dedicated to asking the question, what is the role of topical steroids in managing these kinds of chronic inflammatory diseases? I think our brand is perfectly suited to be able to benefit from this. The data that we show here shows that the efficacy for our atopic dermatitis patients with regard to EASI-75 is consistent regardless of whether or not the patients have tried and failed a topical steroid. We know that these steroid patients should be harder to get under control because they've been around a little bit longer than a novel patient who walks in and hasn't been treated previously. I think these data are very meaningful. We have similar data for psoriasis, for seborrheic dermatitis as well.
Patients coming across from steroids looking for a long-term management of their disease are going to find a strong efficacy and safety profile in ZORYVE.
I'm going to go through this quickly because I know you have a bunch of questions, Tyler. We think we have a lot of wind at our back from a number of different sources. The expanding label that I think all of you know about already, our coverage, both commercial and government, I think is very, very strong. It's picking up even further. Our partnership with Kowa and the access that gives us to the PCP and pediatrician market is very strong. Most importantly, that huge universe of steroid scripts out there where we think we can convert a lot. That's where the momentum comes from. In terms of cash and cash flow and so forth, we ended the year with about $229 million of cash and equivalents. We used, again, almost no cash in the fourth quarter. That was a little anomalous.
We will hit break-even in 2026, but we haven't hit it yet on an annualized basis. We did pay off half of our debt. There was $200 million of debt. We had restructured it significantly, improved the terms quite a lot, including the ability to repay half and then redraw it later if, in fact, we ever want to do that. But the debt's down to about $100 million, with about 125 million weighted average shares outstanding.
Wonderful. Patrick, David, thank you very much for the presentation. We'll get into some questions now. I'll just follow up again on the strength that we saw in Q4. Obviously, you guys posted a very nice result, beat consensus. I think everyone was surprised by the prescription strength going into the end of the year. Obviously, I think people expected the 0.5% cream for AD to grow significantly quarter- over- quarter.
They expected continued growth from the seb derm foam quarter- over- quarter. What was kind of surprising was actually the 0.3% with the cream in psoriasis, right? Because from Q3 to Q2, there wasn't much of a change, but we saw this big change into Q4. Is there anything specifically going on with the cream psoriasis, or is it just all these tailwinds and strength behind your back in the launch that's impacting all these together?
Go ahead.
Yeah. I would say it's the latter. I think that we have improved execution of our sales force. We have an expanded sales force. We're reaping the benefits of that. If you think about the growth across all of these indications, it's really being driven by this kind of movement of patients out of steroids into more modern treatments. We are the preferred option. We're holding a substantial portion of that non-steroidal market right now. We're going to benefit from that. I don't see that there's any reason that that growth wouldn't be able to continue.
Great. At a $250 million run rate, you guys are approaching, I think you crossed the numbers, right? Kind of peak sales potential of what topical products in the derm space have done. I'm excited to see how much you can surpass that. 3% topical market share. Obviously, the steroid percentage market share of that, as you saw with the pie charts, is much larger than that. I'm not sure you're going to replace all of steroids, but can you elaborate on, obviously, if you've got mild disease and you use maybe one tube a year sporadically, you may be okay with a steroid. How many of the patients across these indications are more chronic users where the steroid issues are really significant?
Yeah. I would say, I see patients one day a week as a dermatologist. I think it's really important to understand that kind of day-to-day effort that it takes to manage these patients. I think you captured it really well. The patient that walks in who has a little bit of eczema, it's dry, it's February, and the weather's about to change, and they've got a small patch of eczema somewhere, I think that's a very reasonable patient to have a topical steroid. Again, you're using an acute treatment to treat what we don't think is going to be a chronic disease. When we're talking about a true atopic dermatitis patient, a true psoriasis patient, and even if you look over into seborrheic dermatitis, seborrheic dermatitis is not a disease that patients kind of have for a couple of days, and then it goes away.
If a patient walks in and has seborrheic dermatitis and you ask them about their disease, more often than not, they're going to give you a 10-12 year history. And then all the kind of crazy things they do to try and keep from having that manifest during meetings and stuff that they're doing. To be able to offer them something that can very simply relieve that, I think, is a change from what it is that they've seen when they've walked into the dermatologist's office in the past. I think it really is about finding chronic treatment for these conditions. That group that is suitable for a short-term acute treatment is relatively small, but it is there.
I think the universe of investors has really now started to more fully understand the true size of the addressable market, Tyler. I think it's important to keep in mind steroids are a step ahead for most of our patients in terms of commercial coverage, for example. Almost by definition, they are coming from that universe. It's increasing, as Patrick said.
Fix my mic here real quick. You guys recently launched a celebrity partnership with Odell Beckham Jr. Curious just to elaborate on that a little bit, why you selected OBJ and what you've seen early on in terms of that potentially translating to sales.
The reality, you mentioned selecting him. He actually selected us in a lot of ways. He apparently has suffered from seb derm for a long time, really struggled through it. He tried our product. The doctor prescribed it, and he loved it. It worked really well for him. He actually approached us through an agent and said, "I love your product. I want to work with you." That's how this conversation got started. He, I guess, as it turns out, has a very, very large social media following. I'm not a social media expert, but he has a very large social media following. The number of reads and clicks and so forth has really gone through the moon. It's great.
Yeah. I think OBJ makes a very compelling spokesperson for this disease. He has a beard. That is a particularly troublesome area. His journey is one that is very relatable for anybody who has seborrheic or people who have seborrheic dermatitis and they don't know that they have seborrheic dermatitis. I think that's one of the things that I heard when I heard him telling his story was so compelling, is that he struggled to get a diagnosis for what this actually was. If you don't have a diagnosis, then you're never going to be able to find your way to the right treatment. I think that's where his story is very beneficial for us.
Because I think there are a lot of patients out there that may have tried and then given up on therapies that have been around for many years and were not aware that there is something new, or patients who have seborrheic dermatitis and do not recognize that they do and do not know where to seek help to get the treatment that they need.
Yeah. I guess psoriasis and AD patients are pretty well diagnosed compared to seb derm, right? So he's increasing visibility in the area that you need it most.
Yeah. Absolutely.
The Kowa partnership, you mentioned it started to contribute a little bit last year, hopefully more this year. Most people aren't that familiar with Kowa. Obviously, if you're able to expand into primary care, the opportunity is large. Why did you select them as a partner?
We wanted a partner that had an experienced sales force, but whose existing product lineup was such that they could really put us at a very, very high priority level. The drug that they were primarily marketing before this sort of went off exclusivity. They had a real opening there. They needed something for the sales force to do. They are well-known, they are a subsidiary of a very large Japanese company, very high quality. Again, they were willing to put us in that sort of number one or number two position, which is what we wanted. They were the best partner.
Yeah. Can I just add, I'm super excited about the use of this product in primary care. I used to have the opportunity to, during training, give a lecture to primary care physicians about how they should manage their dermatology conditions. One of the two kind of biggest challenges for them was always, do I have the right diagnosis? Some concern that maybe I'm calling it psoriasis, but it's eczema. Or it's on the scalp, I'm calling it psoriasis, but it's actually seborrheic dermatitis. The second thing is, am I choosing the right therapy that is not going to cause a problem for the patient? If you're talking about topical steroids, you've got like 400 different strengths to pick from. They always wanted to know, which is the strength that I give for this condition? Which do I put on the leg?
Which do I put on the scalp? Which do I put on the face? That is just a very complex algorithm that they are trying to develop in their heads when they are also trying to manage hypertension and everything else. I think this profile, we are covering all of the major inflammatory diseases that are going to walk into a primary care office. You do not have tolerability, local side effects. If you get the diagnosis wrong, if you get the strength wrong, you are still going to get the efficacy and be able to help your patient. I think this relieves a lot of the anxiety that primary care providers had when they are faced with a patient with inflammatory disease sitting in front of them and they are not an expert. Like, what do I do?
That's a very interesting perspective. Yeah, the 0.3% versus the 0.15% isn't going to matter.
It's not going to make a difference. Just as long as they're getting them into the right bucket, then is it inflammatory? Is it on the skin? Then you'll be able to get the patient the relief from whatever they came to see you with.
Do they prescribe a lot of topical steroids? If you look at those pie charts, are they a significant portion of that?
A lot of patients that come into my office are coming from primary care because they want to give them something and then walk them out the door and say, go see a dermatologist. They know that it might be a several-month wait before they can get in if they don't have a pre-existing relationship. They are using a lot. They manage, especially when you think about pediatricians, they manage a lot of atopic dermatitis patients and seborrheic dermatitis because it's associated with the onset of puberty. They see a lot in their offices.
Got it. Gross to net ramped very nicely over the course of your launch. Every quarter it was improving until you essentially hit steady state last year in the 50s, low 50s. You have reiterated kind of that expectation for this year. If I am not mistaken, in Q1, it is going to go to the high 50s before it goes back to its normal kind of mid to low 50s later in the year. Is that how we should think about it?
Yeah. We reached the 50s, I guess, more or less in the third quarter, if not before. We have said that is where we think it is going to be. That is a steady state, as good as you can do. It will vary within the 50s, right? Probably get the lowest gross to net in general in the fourth quarter and maybe the highest one in the first quarter, but it will be in the 50s still. You do have people that accelerate refills into the fourth quarter, deductible resets in the first quarter, some people switching insurance companies. You get that normal retail pharmaceutical product effect, for sure. We think we can be in the 50s throughout the whole year.
Okay. In general, you expect continued growth in Q1 going into the beginning throughout the year? You expect, in terms of revenues, because of the higher gross to net, maybe deductible resets, that Q1's may be a little flattish relative to Q4?
I'm not expecting another 50% growth quarter for the first quarter for some of the reasons that we just talked about. Prescription growth itself, though, is very strong. You can see the scripts every week the way we can. And that looks very healthy. It is a little different than revenue dollars, but that looks very healthy.
Sure. Okay. Great. And the cream PDUFA for pediatric AD patients, ages two to five, approval is highly likely. But can you help define what that incremental opportunity will be for the cream?
Yeah. I think one of the charts had that at about 1.3 million sort of total population. I would imagine a very welcome product, right? How many parents want their kids on steroids? That should work pretty well.
Yeah. I think it is an important part of building the portfolio to be able to capture patients with atopic dermatitis. This is a disease that oftentimes has its onset in infancy and early childhood. Being able to kind of capture those patients when parents and caregivers are the most concerned about the use of steroids on the skin. That 2 to 5-year-old group is one that is very, there's a lot of awareness about steroids and the desire to try and avoid them.
Yeah. The pediatrician has given us a steroid tube for our children. And you're always like, how much do I apply?
That's exactly it. It's like, maybe I'll just try moisturizing a little bit more. I think that the non-steroidal treatment option is one that is very well received within that group.
Great. And PDUFA for the foam, late May for scalp and body psoriasis, also low risk. How do you think about that incremental opportunity on top of the existing seb derm indication? Will it be like what we saw with AD relative to psoriasis or a little different?
Patrick should opine here as well. I think about 40% of psoriasis patients have scalp involvement. It is a big, it too is a very big population that we feel quite bullish about. I should point out that unlike the other launches that we've had, this will not be a new SKU. This will be the same 0.3% foam that is prescribed today for seb derm. You won't have as much information available to you as to the number of scripts written for that indication per se. For that matter, we won't either, frankly. We'll have some. It will be a little harder to understand exactly what's going on. We think the population is quite robust.
Yeah. I mean, I think it fills out our portfolio. What we're trying to build is a brand that is the preferred brand for dermatologists when they have a patient with inflammatory skin disease. Scalp disease has always been very, very hard to manage because you usually have to add one or two scripts to already existing two or three scripts that you might be using in that psoriasis patient. That's usually what pushes them over into a biologic. Biologics are a heavy drag on a health care provider as well as it is on a patient. I think having another option for your scalp patients to be able to kind of keep them within the topical space is going to be very welcome. It's just going to continue to solidify our leadership as the preferred topical for psoriasis patients.
Great. I wanted to spend a couple of moments on your IP position, getting some more questions from investors on that. What can you say about the upcoming litigation? Can you describe the company's current IP portfolio for ZORYVE and what's key to the core family of patents and where you derive your confidence in them?
Let me say a few words about the litigation situation. Then Patrick can sort of help describe the IP portfolio itself. This is the single most frustrating topic for me right now because we're in litigation. There is a limit to what you can say. There are a lot of things I'd like to say, frankly. We feel very strongly about the quality and the strength of our IP portfolio. We have 20 patents. You can hear about them in a few minutes. We feel very good about that. There is a Markman hearing coming up in April. While Markman hearings can sometimes be significant and determinative, this one will not be. It's dealing with one little issue. The trial itself is scheduled really for the spring and summer of 2026. That's where we are. You want to talk about the patent?
Yeah. I mean, as David said, we have a broad portfolio. Just to kind of focus on a couple of things that are particularly challenging to overcome related to formulation. We started the company, our first employee was, I would say, the most accomplished topical drug formulator, David Osborne. That was in the industry. He's now retired from Arcutis. He struggled heavily to be able to find a topical formulation for a drug that is so incredibly insoluble in water. To make a stable formulation. One of the additions of hexylene glycol was really a serendipitous discovery that really changed his ability to create a product that would be shelf stable at room temperature across the concentration range that we're talking about. It wasn't clear that that was going to be able to happen in the early days.
I think for someone to be able to avoid that hexylene glycol requirement and still have a product that is the equivalent of ZORYVE is going to be very challenging. In addition, something that I've never seen before is the PK profile where you have a very low peak to trough. Usually, you have a Cmax after you apply the drug, and then over time, that drops. We see this very unusual PK profile, which we think is critical for the safety and tolerability that we've seen. If you change the PK profile, it's not an equivalent drug. We have meaningful and measurable systemic exposure from the treatment, so it's not something that's really avoidable. If you have a higher Cmax, you're going to see a different safety profile than what we saw.
It's not going to be an equivalent drug. I think that really puts them into a very small box with regard to how it is that they can engineer around even just those two aspects of our patent portfolio.
Very helpful. We're up on time. In closing, I'd like to ask you both, what aspect of the Arcutis story do you believe is most underappreciated by investors at the moment?
For me, again, I think people are starting to get it. I think the size of the addressable market, right? And therefore, how long that we can keep growing at the rate we've been growing.
Yeah. Mine would be a variant of the same. I think that many companies have said, oh, we're going to make a dent into topical steroids. Having been in dermatology for 20 years and heard many companies come and say that, what I'm seeing now at the meetings is not something that we're doing. This is a change in the field. I think we're just well positioned to be able to benefit from that. I think it's a great change for dermatology patients. I think it's going to be exciting to see how this moves forward.
Wonderful. Patrick, David, thank you very much for your time.
Thanks, Tyler.
Thanks.