Okay. All right. Welcome everyone to this session of the Morgan Stanley Global Healthcare Conference. I'm Judah Frommer. Before I welcome the team from Arcutis Biotherapeutics, I'll just read a quick disclosure statement. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, we've got Frank, Latha, and Todd here. For those newer to the story, maybe we can start with a minute or two of introduction to Arcutis Biotherapeutics and the commercial trajectory of ZORYVE thus far.
Sure. Arcutis Biotherapeutics is a nine-year-old biotechnology company focused in the medical dermatology space. We created the company out of recognition that there were not a lot of people in med-derm doing innovative stuff, and there was a lot of unmet needs. We saw a big opportunity, founded the company, and our first product was, or is, a drug called ZORYVE. We had a cream that was approved for plaque psoriasis in 2023.
August.
We subsequently had a foam approved for seborrheic dermatitis in early 2024. We had a different version of our cream approved for atopic dermatitis in the middle of 2024. We just recently had the foam also approved for scalp and body psoriasis. We are expecting another approval for another version of our cream for young kids with atopic dermatitis in October. I've got another program in the pipeline, and we continue to look at expansion of ZORYVE as well. Product is really performing very nicely. It's very effective, on par with the high-potency steroid, very well tolerated, very safe. You can use it anywhere in the body for any duration. We have very good coverage. As a result, in the branded topical space now, we have well over 40% market share. We're the leading branded topical in the marketplace.
Great. With that background, maybe staying high level, you know, how can investors be thinking about prospects for ZORYVE (roflumilast) Cream versus the Foam, ultimate commercial potential for each of those, you know, high-level addressable market questions?
Todd, do you want to take that one?
Yeah. For ZORYVE (roflumilast) Cream versus the Foam, we expect that there will be continued growth across both formulations. With the ZORYVE (roflumilast) Foam and the recent launch, for psoriasis patients, approximately 50% of them have scalp involvement. Prior to the launch of ZORYVE (roflumilast) Foam, there were really minimal viable treatment options within the space, primarily just a steroid solution. We brought significant innovation to the patients that needed a treatment for their scalp psoriasis. The other is offering both a Foam and a Cream, ZORYVE (roflumilast) Cream 0.3%, for now giving choice optionality to the provider and patients, which is a significant differentiator.
Great. How would you characterize the launch of the foam in scalp psoriasis? Could you see eventually providing sales breakouts by indication as we move into the future?
Yeah. We're very pleased with the launch. We've continued to, we saw a robust update relative to the foam. We anticipate that it's that indication. The reason I say anticipate is because both the seborrheic dermatitis and the scalp psoriasis are on the same SKU. For us to be able to break out the volume within that SKU, it's going to take some time to be able to get enough longitudinal data to give us directionally what the uptake is by indication.
Yeah.
As we get more clarity, we'll share that with the Street.
Okay. That makes sense. I think coming out of second quarter earnings, seasonality is a word that's come up a bunch in our conversation since you provided that third quarter sales guidance. Maybe can you just remind us of expectations for the overall franchise's performance in Q3 versus Q4 this year and kind of dynamics that are at play between the two of those?
Yeah, sure. Seasonality I think is a fact of life really for any prescription product. Summertime, people go on vacation, doctors go on vacation. To compound that, the inflammatory dermatoses that we treat, seborrheic dermatitis, atopic dermatitis, and psoriasis all tend to improve in the summertime when it's hotter, it's more humid, and people are out in the sun. There's just a natural course of the disease, and that amplifies the seasonality. We said at the end of Q2, we had 28% top line growth in Q2, about 13% volume growth in the U.S. in Q2. We said that we would see growth in Q3, but it would be moderated. Somehow people didn't hear that right and thought that we were saying we weren't going to have growth. I never said that. I think what we've seen so far actually is that we've been able to sustain growth through Q3.
I think we're sitting around 13%, 14% growth in units so far quarter to date, which given the seasonality that I mentioned, I think is really robust growth. I think it's probably a reflection of the continued progress with the atopic dermatitis launch as well as, you know, Todd mentioned the uplift that we saw in the foam with the scalp and body approval.
Got it. If only there were a transcript of what you said.
Yeah, right. I haven't said it, may have said to a few investors, go back and read what I said. Read my lip. We would expect Q4 to be even stronger. There is a fairly predictable phenomenon of, again, patients refilling towards the end of the year before their deductible resets. I'm guilty of that too. Also, the reverse seasonality as it gets colder and drier and people are inside more and the heat is running, these diseases tend to flare more. There is more opportunity to switch patients as well.
Okay. I don't know if this was in your Q3 explanation, but docs seem like they go on vacation also.
Every once in a while, they do go on vacation. Yeah.
All right. Maybe we can spend two minutes on your co-op partnership and your general trend with primary care doc prescribing and how it could impact the back half of the year and beyond. Maybe just a little history on the partnership, you know, and how it's shaping up thus far.
Yeah. Yeah, we initiated a partnership with co-op promotion within primary care and pediatrics, given there's a significant opportunity there for ZORYVE. With the promotion within primary care, it's a longer selling cycle. There's minimal time that the representative has in being able to educate the prescriber on ZORYVE. It takes a high level of frequency, which drives that longer selling cycle. Nonetheless, we're seeing some encouraging signals, meaning that we're seeing the rate of adoption of ZORYVE is starting to recently increase here. For those prescribers that do adopt, we see them continue to expand their utilization of ZORYVE. One thing that was a lesson learned for co-op and was relative to the prescription fulfillment process and making certain that we create simplicity and efficiency in that process.
Recently, we have now a dedicated specialty pharmacy, and we'll process those prescriptions and help offload the burden of the PA process from the office. We're starting to see uptake within that specialty pharmacy that's encouraging.
Can you help us with an idea of kind of where patients are seen for the indications you're approved in, kind of, you know, derm versus primary care versus peds? Is there a way to break that down?
Yeah, we can break it down with the IQVIA data. We can break it down by specialty, that greatly informs us relative to the utilization across derm, ped, and primary care.
As you think about it, psoriasis is predominantly seen in dermatology, right? Very little pediatrics, and then there is some primary care. AD is a lot of non-derm, both pediatric and PCP. Seb derm, there's a fair bit of non-derm, but that's predominantly PCP because it tends to occur post-puberty. The older you get, the higher the incidence is. Across the three indications, it's about a 50% to 50% split, derm, non-derm, and most of the non-derm is primary care and pediatric.
Okay. That makes sense. Even thinking kind of beyond COA, if we're just thinking about total scripts per prescriber, would you characterize the franchise as still kind of early phase, focused on expanding prescriber breadth, or how would you characterize kind of signs of maturation and deeper prescribing amongst existing prescribers?
Yeah, we see maturation within the breadth. Like in Q2, we had 18,000 providers that prescribed ZORYVE. Our goal now is to really drive depth, and that's depth as far as adoption of the portfolio. We see in the data that the prescribers that do adopt the portfolio exponentially prescribe more of each unique product than if they're writing that product alone. It's to drive the depth within the prescriber base that we have established today.
Especially in dermatology.
Oh, absolutely.
In primary care is probably still more of an opportunity.
Yeah, it's just the opposite. It's breadth in primary care to impact the number of prescribers.
Got it. If they've started with cream and maybe are adding foam on top of that in terms of scripts written, you're seeing both of those pick up over time. You don't see them gravitating towards one or the other for some reason.
No, we see it, as you've mentioned, over time.
Yeah, I think, you know, Todd's talked about this in a number of the calls. I think one of the most important things is, you know, think about it. If you go from writing one version of ZORYVE to writing two versions of ZORYVE, it doesn't double, it triples. Right. If you go from writing two versions of ZORYVE to three versions of ZORYVE, it doesn't double again. It goes up three and a half fold. Right. There's this exponential growth as doctors adopt it more, probably because they're just writing more ZORYVE and it's kind of front and center in their mind.
In terms of doc feedback and kind of, you know, level of comfort with the product, I guess how much does safety versus efficacy, is it, you know, equal balance between the two?
I don't know exactly what the split is between the two, but this drug doesn't have an issue with either one, right? Which is nice. Todd and I were out in the field with our Chief Medical Officer two weeks ago, I think, for the entire week, visiting probably 100 customers. The feedback is just outstanding, right? It's a very efficacious drug. What we hear is it's very efficacious. It's very predictable, right? When they give a patient ZORYVE, the patient is going to get better. There are very few non-responders. They never get callbacks on side effects or safety issues. I think the other thing is the doctors who are using it don't complain about access being a challenge either. Across the board, the feedback has been extremely positive. That's very consistent. We spend a lot of time with customers and we rarely hear any complaints at all.
Okay, great. I guess just speaking of access, kind of the only place we get questions is Medicare Part D, which you guys have talked about. You know, this is not specific to you guys or your products, but I guess how would you elaborate on what's kind of in your control versus not in Part D coverage?
Yeah, Todd?
I'm sorry?
Medicare Part D?
Yeah, Medicare Part D. I think we've continued to have dialogue and discussions with the Medicare Part D plans. As mentioned, it's been a protracted process due to the provisions within the IRA that did the cost shifting to the patient once they meet the maximum out-of-pocket cost. As the Part D plans continue to do their modeling and to make decisions on their formularies, we're having deeper discussions. We anticipate that it could be likely that we are able to gain access on a couple of the Part D plans come first of the year. It's still in negotiations, but we're getting close to being able to do that and to open that door up in the Medicare Part D segment.
Okay, great.
If you look at Medicare, Medicaid versus commercial, it's about a 50% to 50% split.
Yeah.
Yeah.
I think the other aspect of the story that comes up with coverage is pricing close to net. How do we think about close to net stability? I think you've talked about relative stability thus far, but as we think about expanding coverage into government payers, is there potential to move the needle on net pricing or should we expect at that stage?
Yeah. What we've commented on is we expect the gross-to-net in 2025 to be in the 50s.
Mm-hmm.
That's for the whole portfolio. We think that will sustain into the future as we have negotiated and added contracts, including Medicaid and commercial. That 50s also contemplates Medicare. The net price improvement comes from, I think, volume and staying in the 50s despite adding all the contracts that we just talked about. That's where you see the pull-through. At the same time, we've taken a very moderate WAC increase over the course of years. We pull that through as well. You'll see that come through over the course of time.
Okay. That makes sense. You guys have an October PDUFA for the cream, 0.15% in two to five-year-olds. How should we think about that opportunity? What would you highlight as next priority registrational indications? I think you talked about the SNDA for the 0.3% cream in kids, but what should we think about as coming next?
Yeah. As you said, we're expecting approval for AD two to five in October, just about five weeks away. I think that's important for a couple of reasons. The first one is there's a clear unmet need in those younger kids. I think there's a growing anti-steroid or steroid phobia in the general population, but that's particularly acute amongst parents and, you know, fear of using steroids on their kids. What we hear from clinicians is that parents are coming in all the time saying, "Hey, I don't want to put my kid on a steroid. What do you have besides a steroid?" There aren't a lot of options for those kids. We think that's an important indication. Secondly, I think it's an important halo on the overall ZORYVE AD brand that we're approved down to age two.
We're already approved down to age six, but that'll be an important second step to help the overall franchise. After that, we have filed for psoriasis down to age two as well. We have not gotten an action date yet, but I would anticipate, you know, it's about 10 months from now, right? Because we just filed the SNDA. We're currently running a study of ZORYVE 0.05 in three to 24-month-olds. Again, an area, I think, of especially high need for a non-steroidal. A lot of excitement about that study in the pediatric dermatology community. We haven't finished the rolling yet, so we don't have timelines, but that study is enrolling very well, and we would expect that that's something that won't be that far off.
Beyond the three to 24 months, we announced at our Q2 earnings call that we've started running some additional phase two studies in new indications. With ZORYVE, we've got trials ongoing right now in hidradenitis suppurativa and vitiligo. I would anticipate we might start a couple more in 2026, looking at other indications. Based on the results from those studies, I think it's likely that we will pursue further indications for ZORYVE beyond our current indications as well.
Okay. Just sizing the atopic dermatitis opportunity in two to five versus, you know, where you are currently?
Yeah. About half of all atopic dermatitis patients are under the age of 18, right? A good chunk of those patients are under the age of six.
Got it.
Peak onset is in the ages of one to five. Beyond the absolute numbers, I think, again, the proclivity to use a non-steroidal is higher the younger a kid gets. We might see outsized penetration in those younger kids as we go forward.
Okay. That makes sense. Just getting back to COA, is there any messaging that needs to change with approval in younger kids, or is the messaging likely the same with them?
Very much the same, other than it's now approved for your five-year-olds.
Okay. Makes sense. You mentioned hidradenitis suppurativa, but a lot of potentially other indications. I guess given the broad range of indications under consideration, can you give us kind of a peek under the hood in terms of internal criteria that determine whether a disease progresses to formal clinical development? Are these commercial? Are they side space?
Sure. It's a combination of the two, right? You know, we talked on the Q2 call. I think dermatologists love to use drugs off-label, right? That's just what they do. Most of the drugs they use are for off-label use, and so they got a hold of ZORYVE and they're like, "Wow, this is great. I'm going to try it here. I'm going to try it there." You know, we've got like 42 diseases now it's worked in, right? We're not going to pursue all of them, right? Many of them are just too small, right? There are these rare or orphan conditions where ZORYVE works and doctors will either get it through a medical exception or they'll use samples. There are some very large indications. Certainly opportunity size is important. Degree of unmet need is also very important.
Then, you know, we want to see very robust data from the phase two study suggesting that we're better than current standard of care. The combination of those three would make something interesting enough that we might pursue it as an indication. I think the other facet would probably be clarity of regulatory pathway. Anytime you're adopting, going after a new indication, it becomes more challenging with the FDA, versus, you know, something like hidradenitis suppurativa or vitiligo where there's already established products and you know what the regulatory endpoints are going to be.
Okay. That makes sense. Obviously, some of the indications are kind of newer to market, but can you give us a little bit of a history lesson on, you know, therapy duration by kind of, you know, product breakdown? Are there things being put in place to improve lifecycle management? Just, you know, how is duration of therapy kind of trending thus far and what's happening?
Sure. I think all three of our currently approved indications are chronic diseases, unfortunately. I won't say lifelong. Some children do outgrow atopic dermatitis. Yeah, and seborrheic dermatitis sometimes has a later onset. There are age differences across the disease, but generally speaking, these patients are going to be on these drugs chronically. This is a drug that people seem to stay on very long. I think it's early days still, but persistence seems to be very good on the drug. Todd, you want to maybe just talk about some of the things that we're doing to help with patient retention?
With patient retention, we're making sure that we have reached out to every unique patient relative to making sure that they get their refill of that prescription. The other is in working with a dermatologist to make certain that they understand some of the clinical data that we have, especially in atopic dermatitis relative to long-term therapy and where they can move to twice weekly versus once a day to make the product more convenient for that patient, to help that process.
We had said even prior to the launch that we expected patients to go through about two to three units a year, either a can or a tube. The data that we're seeing shows that patients are exactly where we expect them to be, around two to three a year.
Okay. That's helpful. You've guided toward cash flow break even by 2026. I think, you know, what are the most important, significant, the most significant levers or milestones we should be thinking about to get there? Is it just continued execution on the existing business? Yeah, anything you can point us to in terms of kind of tracking the progress there.
Sure. I think you nailed it. The key is the execution on the business. Revenue is the primary variable of getting to cash flow positive, and we stand by getting to cash flow positive in 2026. The things that we've discussed with the phase two lifecycle management are pipeline advancement of ARQ-234 and continuing to focus on ZORYVE. It's all contemplated in that statement of being cash flow positive. We're very judicious of the cash. I'm the gatekeeper of the bank.
Tough cookie.
We want to make sure that we are investing for the growth of ZORYVE. That's the primary driver of the balance sheet and advancing the pipeline like we talked about between lifecycle management, ARQ-234, all fostering the revenue growth. Those are the key variables. Nothing milestone per se. It's just that we continue to execute and meet some of the things that Frank and Todd talked about.
Yep. I mean, I think the only wild card in that equation would be a significant business development. And you know, as we've said repeatedly, we're always active in the business development arena. I don't see business development as an imperative for our company, given everything else that we have going on. It certainly would be nice to have an asset, but I don't need to do a deal. While we're always looking, we have a very high bar. And we're really only going to acquire an asset if we feel that it's a compelling asset and it's something that we can create shareholder value with.
Okay. That makes sense. Maybe just last one, high-level strategy, right? There are some large pharmas you go up against in this space. I guess, you know, what's the competitive advantage of being kind of a smaller, maybe more nimble player with more focus on your asset than maybe some others?
Yeah, I would say we really actually don't compete with the large pharmas. You know, the biggest company we compete with probably is Incyte, which is, you know, a middle-ish size company. The biologics and the systemic therapies, we're actually complementary to, not competing. Most of those patients are on a topical, and ZORYVE is a great option to them, right? I think the competitive dynamic for us is really the other branded non-steroidals, and then most importantly, steroids, right? The competitive advantage there, I think, first and foremost, is you can use ZORYVE anywhere for any duration. You don't have to worry about any of these safety issues, right? That is not true for steroids. They're very good, short-term drugs. They're safe in the short term, but they can't be used chronically, and there's many parts of the body where they can't be used.
Patients end up in these very complicated regimens. They're changing medications, using multiple medications. We're able to solve for all of that, and we don't have the safety concerns that the topical steroids have. We're also once a day, which none of the steroids are, which I think makes a big difference as well. It's in a very patient-friendly formulation, especially the foam, but the cream as well. That's also differentiated versus the steroids.
Okay. Great. Anything we missed that you guys would highlight about the story?
I think you covered all the key points.
All right. If there are any questions in the room, certainly raise your hand. We have some mics here. I'm going to move into a mini survey that we're asking all the biotech companies at the conference. No pressure. Don't feel intimidated.
Hopefully, this isn't about the NFL.
Yeah. No, biotech does seem to be more exposed to external and macro factors of late. Like I said, we're asking each of the management teams these three questions. First topic, maybe less relevant for you guys, but you'll tell me, China's rising biotech innovation. Is that affecting your competitive position in any way? Could it influence R&D internally or potentially business development?
Okay. It is not affecting us. We have used China as a source of innovation in the past. Ivermectin and NMR JAK inhibitor came from China, but we're not aware of any competitive threats from a computing product standpoint coming out of China. I think there's a bigger macro issue for the biotech sector, but not really something that affects Arcutis per se.
Okay. Helpful. Second theme is AI. You know, how would you say Arcutis Biotherapeutics leverages AI kind of from any perspective within your business? How are you thinking about AI's potential to disrupt the industry, both positively and negatively?
That's a good question. I get this question a lot. I'm probably a little bit of a contrarian on AI. I think that AI has the potential to dramatically revolutionize drug discovery, right? The early stages of drug discovery. We don't do drug discovery. I'll just say that up front. I've been involved in drug discovery in the past, but we don't do that at Arcutis Biotherapeutics. You know, we, I would say, are intrigued by AI, and we're always looking at potential use cases for AI. So far, we haven't found a widespread application, nor do we see it as really disrupting the way that we practice. Probably where we're bumping up against it more than anything is actually in the practice of medicine, right? Insurance companies are using AI. Now, doctors' offices are using AI, right?
They're using it to streamline some of their work processes, and that has some secondary effects. I would say at this point, we don't anticipate big impacts from AI on our business. That may change.
Yep.
It feels a little bit to me like dot com.
I hear you. Lastly, maybe more impactful to your business here, just the regulatory side of things. You have frequent interactions with FDA, kind of given the follow-on indications you guys are consistently going for. Changes at FDA, MFM pricing, tariffs, anything else on the regulatory side you highlighted?
Sure. I'll start with FDA. I would say that our interactions with FDA from the outset have been very constructive. We have not seen at Arcutis Biotherapeutics any real changes in those interactions. I think CBER has been more effective than CDER. I think things like the accelerated approval pathways have been more challenging, right? We don't have an impact from any of that. I think the dermatology division has been good partners for us all along. From a tariff standpoint, our primary manufacturing site is actually in the United States. That cushions us a little bit. I think we still have to see what comes out of the 232 investigation. I'm not anticipating the tariffs are going to be a major factor for us either. With regard to MFM, the only other market that we market ZORYVE in is in Canada. Our Canadian price is pretty good.
It certainly is not U.S. list price, but they're very different marketplaces. We'll have to evaluate how things go with MFM and what that actually looks like. We did not get a letter yet. We're a little too small for that. I think it's still to be determined what MFM looks like, but I think it should be an inevitable risk for us as well.
Okay. Great. If there are no questions in the room, I think we'll call it there.
Okay, thanks a lot.
Yeah.
Great. Great talking to you.