Great. Thanks everyone for joining the fireside session today with the Arcutis team. My name is Jason Jun, Managing Director in the Citi BioPharma Banking team. Today we're joined with Frank Watanabe, CEO, and Latha Vairavan, the CFO of Arcutis. Guys, thank you very much for joining today. Why don't we just get really started very quickly if you don't mind just providing a quick introduction of the company and also an overview of ZORYVE?
Sure. Arcutis Biotherapeutics is a little over nine years old. It is a dermatology-focused biotechnology company. The company was founded out of a recognition that there had been really an atrophying of the pipeline of novel dermatology assets. We created Arcutis Biotherapeutics to reinvigorate the innovation in the dermatology space. Our lead program at the time was a topical PDE4 inhibitor that has become ZORYVE. That is our currently marketed product. We have three different versions approved for four different diseases. We have a cream for plaque psoriasis, as well as a foam for plaque psoriasis. The same foam is also approved for seborrheic dermatitis, and then we have a different cream for atopic dermatitis. We have some additional indications coming up.
We expect to get approval for an expansion of the label in atopic dermatitis in October, and we're currently running a study for a yet further expansion of that label. We are getting very close to filing for a label expansion for plaque psoriasis as well for an additional patient population. It's been on the market for about three years. The product has grown very nicely. If you think about the topical marketplace, it's about two-thirds topical steroids, which are 70-year-old drugs that are effective, but they have a lot of issues related to them. ZORYVE is probably the first product that's really well positioned to start to supplant topical steroids with a drug that's equally effective, but much safer, and that can be used for the long term. That's our major focus right now, the commercialization of ZORYVE and the continued expansion of ZORYVE.
We talked at our last earnings call about the fact that we're getting a lot of feedback from clinicians that the drug works in multiple additional diseases. We're starting to explore potential future indications for ZORYVE as well. We've launched a couple of phase II studies, and we'll probably launch some additional phase II studies to explore new indications. Beyond ZORYVE, we do have a pipeline. Most notably, we have a biologic, a novel checkpoint agonist biologic for atopic dermatitis that we just opened up the IND for just about a month ago and are looking forward to taking that into the clinic and seeing how it performs as well. We just recently announced the termination of one of our other programs that had been in phase I, and it just didn't really meet our standard in terms of performance of the product.
We've chosen not to invest in that product anymore and to shift those resources into ZORYVE and into the pipeline.
Great. Thanks, Frank. I guess if you wouldn't mind just helping to frame the market opportunity for a topical like ZORYVE, how it sort of complements and is synergistic with other therapies on the market across your indications. If there are so many specific indication nuances across psoriasis, atopic dermatitis, et cetera, that would be helpful to understand.
Sure. So again, I'll start off by talking about steroids. It's a very large market. We're talking about somewhere in the neighborhood of 45 million patients in the United States suffer from one of these three diseases that we're indicated approved: psoriasis, seborrheic dermatitis, and atopic dermatitis. A fairly large percentage of those patients are on topical medications. Somewhere in the range of 10 million patients, sorry, excuse me, 25 million patients, excuse me, across the three indications are treated with topical steroids mostly. There are other non-steroidal options that have been historically, like vitamin D in psoriasis, vitamin D analogs, topical calcineurin inhibitors in atopic dermatitis, and topical antifungal agents in seborrheic dermatitis. All of those suffer from inadequate efficacy, and many of them also have local tolerability issues. Dermatologists have historically relied primarily on topical steroids.
They're very effective drugs, excuse me, and they constitute about two-thirds of the prescriptions in the inflammatory dermatosis space, which is those three diseases we talked about. The problem with steroids is that while they're effective, they're not really safe for long-term use, and they're not safe for certain parts of the body, like the face, the groin, the armpits, areas like that. Historically, two things have happened. One, doctors and patients have had to make this trade-off between efficacy and safety. Do I use the drug that works, or do I use the drug that's safe? That's a really bad choice for patients and doctors to have to make.
Secondly, and really as a result of that trade-off, doctors have created fairly complicated topical regimens where patients are taking three, four, five, sometimes six different medications at various points in time, different places in their body, different durations of time. It becomes really complicated for the patients. They often don't comply, and then they start having side effects, or they're not using their drug, and they don't have efficacy. ZORYVE comes along, and it really is in the process of revolutionizing that paradigm because you have a drug that is, you know, we haven't done a head-to-head study yet, but if you compare data from different studies, you know, it's roughly comparable to a high potency steroid, and clinicians tell us that as well. You can use it forever. There's no limitation on the duration of use. There's no limitation on the amount you can use.
You can use it everywhere: face, groin, elbows, knees. That dramatically simplifies the management of the disease for doctors and patients, and it eliminates this trade-off that they're having to make between efficacy and safety because you have a safe and effective drug. That has really led to, I was just out in the field last week traveling around meeting with doctors, and they're really rethinking the role of topical steroids now that they have this new option in the management of their inflammatory dermatoses. We're still very early in the stages of conversion from steroids over to ZORYVE and the other more advanced topical therapies, but we're seeing very good momentum in that direction. We're confident that is going to continue.
I think it's interesting, just the last week, two of the professional societies in dermatology actually issued statements saying that clinicians need to reevaluate their use of topical steroids because of the emergence of these new therapies. I think that really is a really strong indication of the underlying trend moving from steroids to the advanced topical therapies. Given ZORYVE's position, we overwhelmingly benefit from that transition.
Yeah, and that's actually a nice segue to the next question, which is now just you've had about three years of commercial under your belt. It seems to be that ZORYVE has built a pretty strong and somewhat of a sustainable position in the marketplace. What do you, aside from some of the product differentiation that you mentioned, what do you think is really you can attribute to as to why ZORYVE has been so successful, whether it's commercial execution or other things? Also, at the same time, have there been any sort of important lessons learned from your commercial experience that you plan to leverage as you continue to expand into other indications and broader age groups?
A lot of questions there to unpack. I think in terms of why we have been so successful, first and foremost, it's the product. It's very difficult to be commercially successful without a good product. This is a product that has very predictable performance. We've published data that over 90% of patients improve when they're treated with ZORYVE, which is a remarkable response rate if you think about it. The side effect safety profile is extremely favorable. We have very, very low rates of side effects, and when they do occur, it's relatively minor things like headache and nausea and diarrhea, which generally does not cause patients to discontinue. Most of our clinical studies, we see 1%-2% discontinuation rates due to adverse events, which is very favorable. Early on, we made a strategic decision that as good as the product was, we wanted it to be widely adopted.
We priced it in such a way that we could optimize our access to the product. That's been another, I think, important aspect to our success. Today we have about 80% of commercial lives have access to ZORYVE. The vast majority of that is with a single step edit. We are rapidly penetrating into the Medicaid population. We've announced publicly that well over half of the lives in the U.S. with Medicaid have access to ZORYVE with a single step or better. We expect that to expand. Longer term, we expect to start getting some Medicare coverage as well. Medicare has been a little more challenging because of the changes that the Inflation Reduction Act introduced into the Part D program. We're confident that that will come as well. That's been an important element of the success of the product. Commercial execution is also, I think, very important.
The topical dermatology space is rather unique. I've worked in a lot of therapeutic areas, and there's really nothing quite like topical dermatology, including different than systemic dermatology treatments, which was an eye opener, I think, for a number of us. We've got a very, very strong experienced team with a lot of topical dermatology expertise that I think has been a major contributor to the success of the product as well.
Super helpful. Maybe just to touch on a couple of specific points about recent Q2 earnings and some of the commentary that you had. Obviously, sales were up 28% versus the first quarter. There was some commentary around expected seasonality heading into Q3. Can you just say a little bit more about your expectations for the next upcoming quarter as well as the rest of the year?
I'm going to pass it over to my colleague Latha.
Yeah, I want to kind of pick up where we left off in Q2 and then give some highlights on recent trends. The comment made in the Q2 call was that the absolute net sales would definitely be higher in Q3 than Q2, that we would see growth in net sales. Because of seasonality due to, one, the summer vacation and what happens in the summer with dermatologists and patients taking vacation and the effects of the disease in the summertime, we expected the volume growth would not be as high. There would be growth, but not as high as previous quarters. Recent trends, and everyone can see our scripts every Friday. If you look at the last, as of last week, quarter over quarter, we've had about 15% unit growth.
We're doing quite well from a volume perspective despite seasonality, which we do see the softness, and you've seen it in the recent couple of weeks. We feel very strong about where we're heading into Q3.
I think we would expect Q4 to return to a very nice growth trajectory, and even better, excuse me, growth trajectory on top of Q3. I think that at least that's in part due to the scalp psoriasis, the scalp and body psoriasis launch that was the very end of Q2.
That we launched at the end of Q2. We expect, as we have in most Q4s, that there's always a pickup based on the weather and everyone coming back to the doctor. Usually we finish quite strong at the end of the year.
Yeah, and maybe just on that point, obviously you launched the ZORYVE foam 0.3% for plaque psoriasis for the scalp and body in June, right? I think that's what you're referencing. Any early observation on how that's going, generally speaking?
Yeah, in fact, I was out talking with customers last week, and the feedback is overwhelmingly positive. I think that there was probably some use of ZORYVE foam in scalp psoriasis already. Psoriasis and seborrheic dermatitis have an overlap. There's actually an entity that the dermatologists refer to as sebo-psoriasis, and sometimes it's hard to distinguish between the two. There may have been some usage of ZORYVE foam before then, but there's definitely been a pickup. I think it's pretty clear in the numbers that we're seeing some pickup. It's still too early for us to be able to split out how much of the foam is seb derm and how much is plaque psoriasis, but I think over time we'll be able to figure that out.
The growth trends, all the SKUs are growing, but the foam is growing particularly well. Atopic dermatitis also continues to be a nice growth driver because it's very early still in its launch as well. Clinician feedback has really been excellent. That's really a game-changing product for scalp and body psoriasis. About the only other option these days for a patient with scalp psoriasis is clobetasol solution, which is a super high potency steroid, which is very effective, but can only be used for short periods of time. It can't be used on the face or other sensitive areas of the body. You're into this complicated regimen of multiple products. In fact, I was talking to a doctor last week, and she was commenting about how much time it saves her when she's not having to write four different prescriptions.
She can just say, "Here's your ZORYVE, you're out the door." It's a 30-second conversation, and she's catching up on her schedule. It helps the patient a lot because they have one product; they just use it everywhere. They've never had a product like this. The reception amongst clinicians has been very, very good, particularly because the foam performs just as well as the cream in treating psoriasis on the body. It actually outperforms on the scalp. They're not giving up anything by simplifying the patient's regimen.
Super helpful. I guess just switching gears a little bit to the next regulatory catalyst that you have coming up with the PDUFA for ZORYVE Cream for AD patients two to five years old. How should we be thinking about that opportunity, broadly speaking, in terms of size and particularly where ZORYVE might fit in the whole sort of treatment paradigm? I guess a related question is, how important is it for ZORYVE to be moving earlier in terms of age? As you mentioned, Frank, earlier that this is forever potentially, right? There's no limitation as to use. How do you frame that AD opportunity with the PDUFA coming up?
Yeah, I think there's really two ways to think about that. The first one is from a patient standpoint. I think the concern about steroids in general is magnified many times over when you're talking about children. The parents are very reluctant to put their kids on steroids. They're concerned about retardation of growth, which is a real thing, as well as all the other side effects that come along with topical steroids. We frequently hear from clinicians that parents are the ones who push back the most on steroids. I think having ZORYVE approved in that two to five age group is very important from a patient standpoint. We also are running a study right now to extend that indication eventually down to three months of age, where there are almost no products approved for the treatment of atopic dermatitis.
For the broader franchise as well, the fact that your product is approved down to three months of age or two years of age has a halo effect in terms of how doctors think about the safety of the product as well. I think it benefits the overall franchise. If you think about this focus of ours of converting the topical steroid market over to ZORYVE, the broader the indications are, the more indications we have, the stronger position we are to really start to supplant topical steroids as the mainstay, the foundational therapy in dermatology.
Sure. Maybe just on that, in terms of the conversion of patients on steroids into ZORYVE, where do you think you are in terms of that whole process? Obviously, there is a large patient population on steroids today. What type of, can you share a sense of volume that you've converted, patients that you've converted, and how much ultimately do you think you'll be able to capture of that base?
Yeah, so I'll talk broadly about the advanced topical therapy market. There are several advanced topical therapies on the market now. That group of drugs generated about 1 million prescriptions last year in the U.S., compared to about 16 million topical steroid prescriptions, right? There is still a massive amount of runway to convert. Now, I don't think it's going to 100% convert, right? 50% conversion would be great, and I think that's very achievable. That would make ZORYVE a really big product. Even 20% conversion would be huge because this market is so large. We are definitely seeing a nice upward trend. I think we announced previously that last year, the advanced topical therapy market grew by about 50% in terms of prescriptions versus the prior 12 months. I think that's a really nice growth trend to see. We're very, very early days in that process.
Very helpful.
Sorry, and just to finish off that thought, ZORYVE, as I mentioned earlier, has about 42%-43% of that advanced topical market as well, right? As that conversion happens, we end up getting not the majority, but the plurality of the benefit, the bulk of the benefit.
The fullest share out of the options out there. I guess just switching gears a little bit to lifecycle management. Beyond the approved indications, obviously you've outlined some plans to expand into HS and other things. Could you just share a little bit more about the clinical strategy around those and how you think about broader, longer-term lifecycle management?
Yeah, as I mentioned earlier, dermatologists have used ZORYVE extensively off-label. Not that we promote that, but that's what dermatologists do. Most steroid use is also off-label, by the way. They have found a wide range of diseases that respond to ZORYVE, inflammatory diseases, but also ZORYVE seems to have some effect on melanocytes, which I think is quite interesting. We see that in resolution of post-inflammatory hypopigmentation and hyperpigmentation in atopic dermatitis and seborrheic dermatitis. There has also been a case report series of ZORYVE in vitiligo, for example, right? ZORYVE has a fairly rapid effect on itch as well. We see itch response within 24 hours of the first application. ZORYVE is having a bunch of different positive effects, so doctors have tried it in all different kinds of things. Not all of those opportunities are worth us pursuing a registrational program for, right?
We are in the process of evaluating the data that dermatologists have generated, determining which of these markets might be worth pursuing. As I mentioned earlier, we are running some small phase II studies to really get a sense of the magnitude of the clinical effect and then potentially moving into a registrational program. Excuse me, we have started phase II programs in hidradenitis suppurativa and vitiligo. I would anticipate that we probably will start several more phase II proof-of-concept studies, and from there, we'll decide which one or ones we would pursue for further indication.
On the topic of growth and expansion in the longer term, can you comment a little bit more about the ARQ-234 asset that you have in your pipeline and also how you think about BD strategy overall?
Sure. With ARQ-234, maybe I'll take the example of the psoriasis market as a comparison, right? I started my dermatology stint on Enbrel, which was at the time a revolutionary drug. We used to talk about PASI 50s. Nowadays, with Bimzelx or Skyrizi, you're getting half your patients or more to PASI 100, right? There's been this remarkable upward trajectory in efficacy in psoriasis. We have not seen that in atopic dermatitis. The 413s are very good drugs, but they don't get very many people to EASI 100, right? They don't even get that many people to EASI 75, right? 40%-50% maybe get to EASI 75. There's still a big unmet need in terms of efficacy. There's also, I think, an unmet need in terms of dosing, particularly in the younger kids.
People who are parents, you can imagine the challenge of giving your kid an injection every two weeks for the rest of their childhood, maybe the rest of their lives. Patients' parents are bringing their kids into the doctor's office every two weeks to get their shot in some cases, right? The parent doesn't want to do it. The ability to extend dosing is potentially also very compelling. We see a big unmet need in atopic dermatitis with systemic therapies. We acquired a company, I think it's three years ago, wasn't it that we bought Ducentis?
Almost four.
Almost four. Yeah, it's been a while. They had a very novel and we thought very promising new therapy for atopic dermatitis. It's a checkpoint agonist. Everyone's, I think, familiar with the checkpoint inhibitors in oncology. You inhibit the immune checkpoint, you rev up the immune system, it kills the cancer cells, right? You agonize those same checkpoints and you reset activated immune cells. You put the immune system back in its sort of natural standby state without immune suppressing. That's a very compelling approach. The company we acquired had what was at the second in that class. The first one has now disappeared. Now we are the lead molecule in that class, which is serendipity for us. We think it's a very interesting target. We need to get in the clinic to see what the magnitude of efficacy is.
I think the most compelling thing that we saw was the potential for protracted periods of patients having response without treatment, right? You can treat for a period of time and stop, and the treatment maintains for months. It's still to be determined how long that lasts. We think that can be a really compelling and differentiating feature of our product versus what's on the market and what's in the pipeline currently.
Do you want to just quickly touch on BD strategy? I know you highlighted external innovation as.
Yeah, you know, we are always looking for interesting new assets as a company. We had licensed the JAK inhibitor. That was the program that we just canceled just recently. We acquired Ducentis to acquire this 234 asset that we were just talking about. We are constantly looking. I would say that the bar is pretty high for business development. Given that we have ZORYVE and ZORYVE lifecycle management in 234, we're not in a position where we're forced to do business development. Having said that, we have a very strong development organization. I think that with the right asset, we could create some meaningful shareholder value. We are always open. Given the overall biotech environment, I think deal flow has ramped up in the last probably nine to twelve months. We're seeing a lot of assets that weren't available that are available now.
That doesn't mean I'm going to buy a bunch of them. It gives us the opportunity to kick the tires and decide, is there anything worth purchasing? I think there's the capability to do it if the right asset happens to come along.
Very helpful. Maybe last, this is a question for you. I think you guided to cash flow break even in 2026. Is that still on track, and is that still the expectation? I guess the question related to that is, you know, how do you think about broader capital allocation strategy once you reach that point?
Yeah, absolutely. Yes, we're still guiding to being cash flow positive in 2026. Our capital allocation strategy, the balance sheet is very much based on ZORYVE and the foundation of ZORYVE, everything Frank just talked about. We believe in the strong growth trajectory that leads to cash flow positive. We'll be basically the fuel that we'll use to fund a lot of our LCM activities and the pipeline. All of that is encompassed in that cash flow positive statement that we've made. In terms of a BD acquisition, we've been very clear that that would require an innovative capital source depending on the quantum and the BD that we do acquire. We think our current run rate and trajectory set up well with what ZORYVE has to offer, the portfolio and the P&L.
Very helpful. I think we're just about coming towards the end here, but perhaps that's one of the last questions that we'll ask. Obviously, you've got, we talked a lot about ZORYVE, we talked about pipeline, BD, financial strategy, et cetera. Frank, a question for you. If you were to take a step back and ultimately ask yourselves, you know, what is the ultimate long-term goal and the strategy of the company, right? I guess a question related to that is, you know, where do you see the company in, say, three to five years' time? I think one of the questions, I know there's a lot of questions there, so please bear with me. For commercial stage biotech companies, it's this classic question of managing growth versus profitability.
How do you sort of think about that question as you think about longer term, three to five years down the line?
Yeah. We set this company up because there was a gap, right? There was some blue ocean in the dermatology space. I don't think that that's changed since we founded the company. If anything, it's probably gotten more acute. Some of the other companies that were in the space have fallen by the wayside. We think there is still a very strong need for an innovation-based dermatology company like Arcutis. I think we're very well positioned to fill that void, and we're in the process of filling that void as we speak. Three to five years from now, I think that we will only have strength in that position. I anticipate that we'll have more in the pipeline, either through internal development or through business development. We'll have continued to advance both ZORYVE and ARQ-234. Five years, ARQ-234 won't be out quite yet, probably.
These things take a while, but certainly we'll have progressed very nicely. I think that we'll probably have made very substantial headway in terms of this conversion of the topical steroid market. Remind me what the second half of that question was.
In terms of how you think about growth versus profitability.
I don't know that it's an either-or proposition. I think it's sort of a Goldilocks kind of thing, right? Particularly once we achieve cash break even, I think it's important for us to manage our spend so that we don't create a situation where we start running out of money again, right? Obviously, business development will have to factor in that. That could be a variable if we were to do significant business development. Short of that, we'll need to manage our resources and live within our means. By doing that, that will allow us to also grow. I think we're not a bank. If we can't find good places to invest our money, then we'll have to think about other ways of managing the capital that we're generating. I certainly never want to be wasteful of shareholder money.
I'm a shareholder myself, so I think very carefully about that every day, where we're investing and whether we're going to get a good return for our investors or not. We'll continue to evaluate, is it best if we invest this or is it best if we do something else with the capital?
Perfect. I think those are all the questions that we have for today. Frank and Latha, thanks very much for joining us today.
Thank you.