Good day, and welcome to the Arcutis Biotherapeutics 2024 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. Now I'll pass the call to Latha Vairavan, Vice President, Finance and Investor Relations. Please go ahead.

Thank you, Carmen. Good afternoon, everyone, and thank you for joining us today to review our third quarter 2024 financial results and business update. Slides for today's call are available on the Investor section of the Arcutis website. On the call today, we have Frank Watanabe, President and CEO; Patrick Burnett, Chief Medical Officer; Todd Edwards, Chief Commercial Officer; and David Topper, Chief Financial Officer. I would like to remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factor. With that, let me hand the call over to Frank.

Thank you, Latha, and thank you to everyone for joining us today. With that, let me turn to Slide 5 of the deck. I'm pleased to report that we maintained our robust growth trajectory in the third quarter, and I'm constantly impressed by the entire Arcutis team and its exceptional execution. Our expanding ZORYVE portfolio now encompasses psoriasis, seborrheic dermatitis, and atopic dermatitis, providing physicians and their patients multiple forms of ZORYVE cream and ZORYVE foam to address their needs. ZORYVE is the first and only topical anti-inflammatory agent with indications for all three of these very highly prevalent conditions and physicians are becoming increasingly familiar with our product portfolio. ZORYVE portfolio sales grew 452% year-over-year and 45% quarter-over-quarter, reaching $44.8 million, which is remarkably strong, particularly following the impressive growth we've had in previous quarters. Furthermore, our third quarter revenue run rate is an encouraging sign for an excellent finish to 2024 and provides us with strong momentum going into 2025, continuing to demonstrate the significant opportunity for ZORYVE. From a volume demand perspective, TRxs for the ZORYVE portfolio grew 25% quarter-over-quarter. New prescription growth was also impressive, increasing 23% quarter-over-quarter. Also on this call, you will hear Todd discuss the ongoing gross-to-net improvements progress we are attaining, and I'm delighted that we are now in the low 50% range, a meaningful improvement from the high 50s last quarter. Our atopic dermatitis launch has been steadily gaining since the late July launch, and we're excited about the long-term potential of this additional indication and its expected contribution to the overall brand. Looking forward to the remainder of the year and into 2025, we believe we are well positioned to maintain strong revenue growth. Historically, many topicals have struggled to grow revenues or to sustain that growth long-term, but we…

Thank you, Frank. We are extremely enthusiastic about the growth and expansion of our product portfolio, strong response from HCPs and patients with immense opportunities that lie ahead. This quarter, we achieved $44.8 million in net product revenue for ZORYVE for the third quarter of 2024, reflecting 45% growth over the second quarter, continuing the strong quarter-over-quarter growth trend that we have had throughout the year. We have now delivered more than 40% quarter-over-quarter growth in revenue every quarter since Q1 of 2023. This robust revenue growth was driven by both prescription growth across the portfolio of ZORYVE products and gross-to-net percentage improvements down to the low 50s. Prescription growth was driven by strong uptake of the foam formulation and progression of the launch of the 0.15% cream for atopic dermatitis and the ripple effect of growth into the 0.3% cream for psoriasis. We look forward to a strong finish to 2024, which is expected to set us up for a steady start in 2025. This will position us well going into the softness typically seen in the first quarter of the year, driven by patients enduring deductible resets, switches to new health insurance and consequently prescription refills pulled forward into December. So in Q1, this leads to both gross-to-net and volume dampening. Moving to Slide 10. The ZORYVE prescription volume has reached yet another all-time high at 11,000 scripts over a rolling four weeks. Quarter-over-quarter prescription growth was 25% over Q2 and 280% over last year. In this graph, inflections in growth for the launches of ZORYVE foam for seb derm and 0.15% cream for atopic dermatitis is clearly visible. Regarding our recent atopic dermatitis launch in the quarter, we are very pleased with the performance of this launch and continue to see strong momentum. As we have said…

Thank you, Todd. I'm on Slide 16. I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast to the dermatology community in the clinic and continuing to hit all of our timelines with regard to regulatory milestones. And we were just at the Fall Clinical Dermatology Conference and received a lot of great feedback about ZORYVE cream for atopic dermatitis. HCP excitement is growing as providers build their own clinical experience with ZORYVE and AD, and confirm that the product profile is a good fit for what they and their atopic dermatitis patients are looking for. So keeping with AD, we're looking forward to the submission of our sNDA for the treatment of mild to moderate AD in two to five year olds, which is planned for quarter one of 2025. And we continue to generate additional data that should ultimately support expanding the psoriasis indication down to the age of two. For foam, we have a PDUFA date approaching in May for scalp and body psoriasis. If approved, this will represent our fourth indication for ZORYVE. And in a moment, I want to share some of our patient responses and data, so you can see why we're so excited to bring this indication to patients. Finally, we're progressing our pipeline. Coming up in 2025, we expect to file the IND for ARQ-234, our biologic CD200 Receptor agonist for atopic dermatitis. And we have a Phase 1b readout in the first half of 2025 for ARQ-255, which is our topical JAK in alopecia areata. Now coming back to ZORYVE foam on Slide 17 and our next new therapeutic focus, which is leveraging the properties of ZORYVE foam to help patients with scalp and body psoriasis. Almost half the plaque psoriasis patients suffer from scalp involvement,…

Thanks, Patrick. I'm on Slide 20, showing financial results, both year-over-year and quarter-over-quarter. As you've heard, we generated net product revenues in the quarter of approximately $45 million, which is up 452% from Q3 of 2023 and 45% from Q2 of this year. This persistent strong growth reflects our continued success in gaining share of the very large addressable market for all three of our approved indications, and we certainly believe this growth is still in its infancy. For the third quarter, our R&D expenses were $19.5 million, which is down 26% from $26.2 million in the third quarter of 2023 due to decreases in the development costs of topical roflumilast programs and relatively flat compared to the second quarter of this year. Please keep in mind that a large portion of the expenses included in the R&D line item is comprised of medical affairs activities supporting ZORYVE commercialization and manufacturing costs for pipeline candidates. SG&A expenses were $58.8 million for the third quarter of 2024 versus $47.6 million in the same period last year as we invested in both our current and future launches, including expansion of our field force in late Q2. That total was more or less flat to last quarter, with G&A coming down by approximately $2 million as we found expense savings, while commercial costs increased by a little under $3 million, which is to be expected as we experienced robust sales growth. We still believe that we are investing appropriately in the tremendous growth potential of ZORYVE portfolio while constantly looking for ways to achieve savings and efficiencies. For the fourth quarter, excluding the commission to Kowa, we expect total expenses to remain roughly in line with Q3. The Kowa commission will be included on the SG&A line and to the extent that our…

Thanks, David. Our goal is to make a positive and meaningful impact on the lives of people afflicted with chronic dermatologic diseases. With ZORYVE now launched in three indications, we are proud to be helping millions of medical dermatology patients while building shareholder value. We are confident that our strong performance in Q3 '24 portends strong and sustained growth for the rest of '24 and strong momentum going into 2025. And with that, we'll open it up to Q&A.

Thank you so much. [Operator Instructions]. One moment for our first question. It's from Vikram Purohit with Morgan Stanley. Please proceed.

Vikram?

Hi, good evening. Thanks for taking my questions. So we had two, one on the primary care partnership with Kowa and then one on the pipeline. So, Frank, I think you mentioned that you expect to see a contribution there starting in 2025. Just curious what you would expect the cadence of that contribution to be and how you think it might trend throughout the course of next year? And then secondly, for the alopecia areata readout expected in the first half of next year, just curious to see how you guide us to interpret that data set and what you're looking to establish to keep moving that program forward? Thanks.

Sure. Thanks, Vikram. Todd, do you want to maybe take the PCP question and then Patrick, you can address 255?

Yes. In reference to the Kowa co-promotion, first let me just say that, as mentioned, that Kowa has been actively promoting since September in both the primary care and ped specialties, and that has been very well received. They continue to engage with those specialties. But you got to remember that within primary care and within the peds market with a branded topical like ZORYVE, it's a little bit of a longer selling cycle. Not only are they introducing a new brand, but a new non-steroidal with some new processes and such. And albeit that there's a great reception of Kowa in promoting the product and getting great feedback relative to the recognition of the differentiation of the asset of ZORYVE across all three indications, it will take some time to be able to ramp up that. As we mentioned earlier, we are expecting a meaningful contribution in 2025. But at this time, we're not providing guidance on what that contribution will look like next year.

And I can pick up on the 255. So that readout, that's a Phase 1b study in alopecia areata, and it's primarily a safety and biomarker study, although we do have some clinical endpoints in that trial. The treatment duration is relatively short at just three months. So what we're really looking for is just some evidence that -- first of all, we're looking for evidence that the drug is safe and tolerable in topical application to the scalp, but we expect that to be the case. And also on the efficacy side, we're looking for some evidence that we would be successful in a later clinical trial that would be a longer duration of treatment.

Got it. Thank you.

Thank you so much. And one moment for our next question. And it's from the line of Seamus Fernandez of Guggenheim Securities. Please proceed.

Great. Thanks so much for the question. So congrats on the quarter. Obviously, a very impressive result. Can you guys help us with a couple of things? First, was there any stocking in the quarter that contributed to the impressive result? Just based on our math and the low 50s number, we would have gotten a very, very, very modest stocking contribution, maybe less than a couple of million, but just wanted to know if there's any clarity on that? And then second, as we look forward to the sort of coverage dynamics in 2025, can you just help us understand, I believe, the timing of coverage dynamics outside of Medicaid, but more along the lines of Medicare and treatment opportunity in seborrheic dermatitis. Can you help us understand how that will come on and how the launch will progress in that potential patient population? The reason that I ask is because with the $2,000 limit within Part D, that seems like a very robust opportunity for the company to market towards. Thanks.

Yes, sure. Thanks, Seamus. Yes, David, you want to take the stocking question? And then, Todd, I'm going to throw it back to you on the question around coverage in '25.

I think Todd will take the stocking question. I'll comment.

Yes, I'll take that. So we did not see any stocking relative to the actual gross-to-net. Let me just kind of put a little color around our gross-to-net and what was driving that. And first, we're very pleased with the improvement gross-to-net in the Q3. And it's primarily driven by the team's efforts in converting a greater percentage of prescriptions over to the paid prescriptions. In addition to that, they were very successful in creating a very predictable and efficient prior authorization and fulfillment process, which enabled the derm offices to drive those paid prescriptions. And then coupled with that, there was a decline in patient deductibles and co-pay as we moved throughout the year. So the gross-to-net improved quarter-over-quarter for all indications. And PsO was in a steady state in the 50s, as we mentioned last quarter. For foam and seb derm, it reached the 50s this quarter, which was earlier than anticipated. And we continue to see improvements in the atopic dermatitis gross-to-net. And then kind of looking at atopic dermatitis as we go into 2025, and if I remember your question relative to Medicare Part D, we continue to have very positive discussions with the Medicare Part D payers. Those are going well. The one thing that -- which is unrelated to the discussions we're having with the PBMs is the Inflation Reduction Act, the introduced changes that are happening there. It's impacting the PBMs in several ways, but more particularly relative to their operations. It's slowing their operations as they grapple with implementing the mandated changes that are happening effective January 1, 2025. So albeit our conversations are positive and going well. It delayed our ability to secure coverage here in 2024, but we do expect coverage in 2025, which will certainly enable not only the atopic dermatitis indication, but of course, psoriasis and seb derm.

Great. Thank you.

Our next question is from Uy Ear with Mizuho. Please proceed.

Hey guys. Yes, thanks for taking the questions. And congratulations on the quarter. So maybe the first question on gross-to-net. With Kowa coming online and you guys going into the primary care, just wondering how does that perhaps might change the gross-to-net going forward? You guys indicated that you're also expecting seb derm to kind of reach steady state by the end of the fourth quarter. So yes, just wondering what the impact to gross net would be with Kowa?

Yes. Todd?

Yes. Thank you, Frank, and good question. So we don't anticipate Kowa's promotion and primary care piece to impact our gross-to-net. It's the same payer coverage, the same fulfillment prescription process as it is in dermatology. So given that's very consistent, we don't anticipate any adverse impact relative to gross-to-net coming out of Kowa's promotion in those two specialties.

Thank you. So you expect pretty much most of the prescriptions to go through your specialty pharmacies and not to retail. Is that the case where you have a trade-in program versus sort of reimbursing at the retail centers or pharmacies?

Yes, exactly why it's a good question, is that Kowa is leveraging our pharmacy network that we have established for dermatology. We've got a number of derm specialty pharmacies that are working with those derm specialty pharmacies, since this is a re-prescription. They'll receive that from Kowa, whether it comes from pediatrics or primary care. So it'll be very consistent in how those prescriptions are fulfilled in dermatology as they are in primary care or peds.

Okay. And second question is with Lilly expecting to complete their CD200R agonist in mid-2025, you yourself have won ARQ-234. I guess like what would you want to see from the Lilly data? And based on what you see, how would you kind of perhaps reprioritize or change the way that you're thinking about moving this particular asset forward?

Sure. Patrick?

Yes, absolutely. Thanks for the question, Uy. So what we would like to see out of that Lilly readout is just continued support for the efficacy that's already been demonstrated in atopic dermatitis with the CD200R agonist mechanism of action. I think any validation within that mechanism of action is very helpful for us. Obviously, it's -- you can't read too much into the specific numbers because we actually think that we're going to be able to be differentiated nicely against that Lilly compound. So we feel really strongly about being able to generate some good differentiation data as we develop that more further into our first clinical trials and then into the later ones as well. And we -- our plan is to -- as with all of our programs, is to move them forward as quickly as we can. So the more excitement that there is around CD200R, I think it's just better for us.

Okay. If I can ask a third question. Maybe could you help us quantify the impact from Hurricanes Helene and Milton, if possible? Thanks.

Sure. Todd?

Yes. Good question, Uy. And relative to the hurricanes, we saw some nominal impact directly within those affected areas. But probably as you've noticed, our volume, though for quarter-over-quarter has obviously been strong. With ZORYVE foam, we have 53% quarter-over-quarter growth, which we're very delighted with. So although some impact from the hurricane, we were quickly able to recover from that and continue to see strong demand performance across all three of the indications.

Okay. Thank you.

Thank you. Our next question is from the line of Serge Belanger with Needham. Please proceed.

Hi, good afternoon. And congrats on the solid quarter. A couple of questions from us. The first one, I guess for Todd, a follow-up on a prior question regarding Medicare coverage. Can you tell us what proportion of the ZORYVE Medicare Part D TAM do you expect to have coverage for in 2025? Just trying to get an idea of if this is a multi-year project to get full Medicare Part D coverage.

Yes, I'll be happy to answer that. So relative to the Part D coverage in 2025, when we contract with the PBM managing the Part D benefit, when we contract with them, we'll contract for their portfolio, their book of business of the Part D benefit. So we'll be able to, once we contract, pick that up fairly instantly, which we anticipate to be able to secure Medicare Part D within 2025. Did that answer your question?

Yes. I mean I guess how much of the Medicare Part D TAM will that initial coverage for 2025 cover? Is it the entire Medicare Part D business for ZORYVE or just a portion of it initially?

It will be initially a proportion of it, initially. And it's just difficult to be able to tell you exactly what specific percent that is of the total Part D volume. But I anticipate picking up a majority of the Part D impact to their different books of business. And then as we roll on, we'll pick up the additional coverage. One thing you can think about is relative to the indications, if you think about psoriasis, it's more commercial insurance oriented. About 70% of that is commercial. But when you cut across seb derm and atopic dermatitis, it's closer to a 50-50 split between the commercial business and the government business. So within that framework, we will start to pick up the benefits in 2025 and then have opportunities after that to pick up any coverage that we didn't initially pick up.

Serge, maybe if I could just add, I think it's important to keep in mind that Medicare Part D actually looks a little bit like the commercial business, right? You've got multiple different insurance plans managing different chunks of the Part D population. And then within those plans, you have different books of business as well. And when we contract, we might get one plan or one book of business with one plan and then there's a delay with another. So it's a little bit lumpy and very much like commercial where over time, you pick up -- maybe you get a little bit at the beginning and then you progressively add and add and add and add as time goes on. You should expect to see something very similar in Medicare. It's not binary the way as one might think because the Medicare program has become so fragmented in the way that Part D benefit is managed.

Okay. Got it. And then from a competitor environment standpoint, just curious if you expect changes now that your direct competitor has changed hands and has had a bit of a delay for their AD approval?

Well, I think it still remains to be seen how the transition of topical tapinarof from one company into another changes the marketplace. Certainly, the delay in the PDUFA action date for tapinarof in AD is a very positive development for us. It just gives us more headway to continue to build our brand, although I think as Todd showed you guys on the slide, I don't really see that as our primary competition. I think first and foremost, steroids are our main competition. And then in the branded AD space, obviously, Opzelura is an important competitor as well. But I think it's still too early to tell what the impact of the change in ownership of tapinarof is going to have.

Okay. Thank you.

Thank you. One moment for our next question. And it's from Kambiz Yazdi with Jefferies. Please proceed.

Hey team. Thanks for the opportunity to asking questions. I guess first one is what proportion of the 3Q sales are attributable to the Kowa deal? And can you remind us how long Kowa will prioritize ZORYVE and kind of what doctors you'll be focusing on? And then I have some follow-ups.

Yes. So…

I think -- go ahead.

Go ahead, Todd, yes.

No, I think we heard your question correctly. The results from Kowa in the third quarter were essentially immaterial. They got started kind of mid-September. And so we haven't seen anything material yet.

Yes. And then, Kambiz, in terms of the other questions, the agreement is a five year agreement, and the deal is structured in such a way that ZORYVE has to be the -- one of the priority products in their portfolio throughout the five year period.

Great. And then maybe just a couple of follow-ups for me more on the government payer side. What's kind of the blend of commercial versus government payer contribution to your 3Q revenue? And then as a last question, can you remind us how your pricing strategy was informed? And has it enabled faster negotiation with payers than, say other branded topicals? Thank you.

So maybe I'll take the pricing one and then, Todd, you can touch on contribution from Medicare and Medicaid. So our strategy from the outset was to try and optimize our access to the Medicare and Medicaid populations. It's a very significant percentage of our target populations, roughly about half of the patients with the diseases we're currently treating. And one of the keys it was -- in our mind, was to try and avoid being placed in the specialty tier with Medicare. And so that was one of the key variables as we set the price for ZORYVE. And I think while we haven't received Medicare coverage yet, I think the very rapid progress we made on the commercial front and the very rapid progress we're making now on the Medicaid front really prove that we took the right approach in setting the ZORYVE price so that we can maximize that access. And as Todd said, we are very confident in our ability to secure very good Medicare coverage as well as '25 progresses. And then, Todd, can you maybe just comment on what we're seeing today currently in terms of contribution from Medicare and Medicaid?

Yes, absolutely, Frank. And so what we're seeing today was, I'll say, within Q3 as far as the net revenue, it was primarily driven by commercial. As we mentioned in the Q2 earnings call, we did pick up some Medicaid. I mentioned Florida, Texas, New York. So there is some uptake in volume there. But for Q3, it was primarily the commercial business. The states that we picked up in Medicaid, the ones we mentioned on this earnings call, those are all future opportunities for us, and we plan to be able to drive incremental growth. And those are great growth opportunity for us. And as mentioned, we plan to pick up more Medicaid states as we roll forward.

Thank you so much.

Thank you. And as I see no further questions in queue, I will turn it back to management for final remarks.

I'll just keep it short and sweet. Thanks to everyone for joining us, and we look forward to talking to you all next quarter. Thank you.

And thank you all for participating in today's conference. You may now disconnect.