Arcutis Biotherapeutics, Inc. (ARQT) Q3 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics, Inc. Q3 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand over the conference to your first speaker today, Eric McIntyre, Head of Investor Relations. Please go ahead.

Thank you, Chris. Good afternoon, everyone, and thank you for joining Arcutis' first quarterly earnings call. On today's call, we have Frank Watanabe, President and CEO; Scott Burrows, Chief Financial Officer; Ken Lock, Chief Commercial Officer; and Patrick Burnett, Chief Medical Officer. During this call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. We will then go to Q&A after our prepared remarks. With that, I'll hand the call to Frank.

Thanks, Eric. Yes, I'll just add my thanks as well for joining us for our very first earnings call. Today, we're going to be talking about our third quarter performance as well as providing some general updates to you all on our business and the progress that we've made so far this year. So you should have access to the deck on our investor webpage. I'm on Slide 5 to start with. We've been talking all year along about 2022 being a transformational year for Arcutis. We've already delivered on a number of very important catalysts and we've got one very big one coming up just ahead of us. As you look at this slide, I think it's really remarkable, everything that our organization has been able to accomplish just in the last 3 quarters -- and last 3 months, excuse me, last quarter. Obviously, first and foremost, was the launch of ZORYVE 0.3% cream for plaque psoriasis. This is a massive step forward for us in fulfilling our mission of helping patients and bringing meaningful innovation to dermatology. The launch continues to progress really well and momentum is building. And we've got the right team. We're confident we have the right strategy and we certainly know that we've got the right product profile in ZORYVE continue to prove all of that and then to seek out additional reformat indications as we've talked about before, seborrheic dermatitis, atopic dermatitis and scalp psoriasis. And Ken is going to be talking a little bit more about the launch in just a few minutes. I want to take just a minute to talk about the very exciting access wins that we just announced about an hour ago. I think that this is a validation of our responsible pricing strategy and is delivering on the broad high-quality access that we've been talking about. I want to emphasize, these are fully executed agreements as well as actual coverage. This is not just a contract being signed, but actual coverage for our product for a major PBM and for a major health plan. Ken is going to talk a little bit more about that as well in his comments. But this continues to build on our launch momentum with differentiated coverage that is very high quality and ultimately, is going to be less burdensome for prescribers and patients. I think we've made really good progress on building a sustainable and leading medical dermatology company through the continued development of our pipeline. We're going to talk a little bit more about the Ducentis acquisition earlier this quarter in just a minute and why we're excited about that acquisition. And then Patrick is going to also walk us through some very exciting top line results in more detail from the ARRECTOR study in scalp and body psoriasis. And I will have to say -- I do have to say, I think physicians are phenomenally excited about our foam product for both seborrheic dermatitis as well as for scalp. We think that offers real innovation as well as some competitive insulation for something like the 40% of patients with psoriasis who have scalp involvement as well as the seborrheic dermatitis population. I think as everyone is very well aware, we've completed enrollment in both INTEGUMENT-1 and INTEGUMENT-2 in atopic dermatitis. We're cleaning the data, running the analysis right now and we look forward to sharing those data with you from both studies before the end of this year. And then Scott is going to talk a little bit more about our financial position, but we're feeling very differentiated in the biotech space right now given the strength of our balance sheet on the back of the 2 financings that we accomplished in August, both the equity deal and the debt deal. And that gives us really the requisite funding for both the launch of ZORYVE as well as funding our growing pipeline in immunodermatology. Turning to Slide 6. I think many of you have seen this before. This is just our pipeline slide and I really just want to touch on this to recognize our continued progress across our various programs and continue to build for the long term by harnessing our unique topical formulation expertise as well as our deep dermatology clinical development expertise. And that's both innovations that are coming from our internal engine, and Patrick is going to talk about a little bit more about the progress on our preclinical programs as well as through external innovation such as the business development deal we did with Ducentis for the CD200R asset. On Slide 7, let me talk for just a couple of minutes about the Ducentis opportunity. We really see this acquisition as being transformational for us as a company and really moves us significantly forward in our journey to become the preeminent immunodermatology company. I think most importantly, it's important to emphasize that we are really sticking to our knitting in terms of our stated strategy consistent with our priorities. This is a large market with very large unmet medical need still. It's a biologically validated target and this looks like it potentially could be a best-in-class molecule. As we said before, we don't do me too products. And we don't consider ourselves just to be a topical company, never have thought of ourselves that way. Over half of our medical commercial and manufacturing organizations already have experience in biologics and we'll be leveraging that expertise to continue to progress candidates, including Ducentis through the clinic and into commercialization. And the Ducentis molecule is really complementary in atopic dermatitis to roflumilast. And it enhances our ability to potentially offer treatment options across the spectrum of disease from mild to moderate on the one hand to severe at the opposite in the extreme. And then finally, we were able to acquire the asset for a very modest upfront investment and minimal spend in the short term. And so it doesn't have a significant impact on our financial outlook going forward. Folks have asked us on the next slide now why we're so excited about this target. Again, as I said, we see a very large unmet need in atopic dermatitis in spite of all the recent progress. It's a very large and rapidly growing market. I think DUPIXENT is a very good drug, and you've got some newer options coming along as well. But even with those innovations, less than half of patients are able to achieve the 75% improvement in their disease. And so we see a real opportunity to continue to advance the standard of care. Checkpoint agonism is a very exciting emerging strategy in immunodermatology. It's really the opposite of the checkpoint inhibitors that many of you are probably familiar with from the oncology space, if you agonize the checkpoints [indiscernible] system, you reset overactive immune cells, so you're able to modulate overactive immune cells without really immunosuppressing. Earlier this year, we saw some data that was released by a competitor with a monoclonal antibody against CD200R. We were very interested in that data. I think it showed some really impressive efficacy in humans. And I think probably one of the most remarkable things was the durable response with up to 12 weeks of efficacy even off drug after treatment had been ended. And that was really what led us to get much more excited and greater conviction around CD200R. And so we launched an effort to find a CD200R asset. We identified Ducentis and we're able to acquire what we are now referring to as ARQ-234, which is a fusion protein against CD200R. And we believe based on the data we've seen thus far, I think ARQ-234 offers us a great opportunity for potential differentiation on efficacy or potentially on a better dosing regimen. So some important points of differentiation. So we look forward to updating you in the coming quarters as we progress that program as well. And with that, I'm going to turn it over to Ken to talk a little bit more about the ZORYVE launch.

All right. Thanks, Frank, and for following along, we're on Slide 10. So thanks, Frank. And since our approval at the end of July, we've made strong and steady progress in driving the uptake of ZORYVE and really changing the mindset of what a non-steroidal topical agent can do for a psoriasis patient. In particular, a next-generation PDE4 that can break away from the pack and do what others couldn't, powerful efficacy in tough-to-treat areas coupled to an incredible tolerability and safety profile. Firstly, I'd like to note how quickly we were out of the gate with drug and channel post-approval, credit to the teams and manufacturing and commercial operations for making that happen. I've been pleased with our commercial execution and leading indicators of all continuing to point upwards, whether they be talking about awareness, from a physician notation standpoint, intend to prescribe and overall receptivity to our profile. The feedback from the field continues to be incredibly positive, building goodwill with all the patients we've been able to treat to date, and that's the read is delivering on its promise. And lastly, we've seen adoption, not just from topical corticosteroids as anticipated, but also other categories and products, which I'll get into shortly. We've now seen over 4,000 prescriptions of ZORYVE since our mid-August launch with some very healthy double-digit growth over the last 6 weeks since our full field team has been out. We're also making positive strides on the payer front, securing our first major commercial payer win with the formula inclusion on a top PBM plus a large national health plan. This is ultimately the true gating factor in the path towards meaningful growth inflection and growth in improvement and where we can really judge what the longer-term prospects of ZORYVE can be. Lastly, we continue to march toward a thoughtful and sustainable launch with ZORYVE that can sustain itself. Now essentially through the early weeks of the ZORYVE's launch, but thinking about the 3 other potential launches in the next 24 to 36 months with the foam and cream formulations. Looking to Slide 11, we've seen some very nice week-over-week demand growth, particularly after the full availability of ZORYVE to the key EMR prescribing systems used in higher-volume dermatology settings as well as the deployment of the full sales team. As you recall, we hired the team in waves and we're now running on all cylinders. Coming out of the holiday week in early September, we see strong and steady growth fueled by continuing interest in the product and our ability to fully penetrate the dermatology community with our team and tactics. The result in demand and the shape of the uptake curve reflects a measured approach with respect to growing demand organically without the aid of temporary accelerators such as full buydowns, vouchers or other offers. But also should not generate stalling activity as these types of programs are withdrawn from the market and a new behavior has to be established, not to mention the impact on gross demand. We're very confident that our demand trends will continue to accelerate and the next demand catalysts are the beginnings of commercial coverage, which will allow the increasing numbers of patients to experience the benefit of the ZORYVE at the lowest out-of-pocket price of $25. Moving to Slide 12. I want to speak a little bit about the source of business for ZORYVE. So currently, we're seeing a healthy mix. Approximately 55% of our patients are switching over from either a topical corticosteroid or steroid combination product, which is really a confirmatory signal here that we can and will penetrate that marketplace and actualize on the true opportunity in the topical dermaceutic. Now that we're about 2.5 months in, not expectedly, we're also beginning to see refills pick up. Still very early days, but we're very encouraged by this trend. Lastly, there's a very interesting set of switching going on from other agents [indiscernible]. So looking at the approximately on Slide 12, 4 of 10 patients that are coming from non-steroidal options, we see adoption of ZORYVE coming from, first and foremost, older non-steroidal agents such as calcineurin inhibitors and vitamin D analogs. This is expected as those agents are often irritating, not effective or both and represent compromise as one has to make post initial steroid use. We do see a small trickle of psoriasis biologics. Our agents likely being used in either combination or leave biologic given where the patient is in their treatment journey. We've also seen a healthy percentage come from other non-steroidal competitors in the space, which is unsurprising given the order it launched, but also because of some of the challenges experienced there. And lastly, Otezla, which we don't really see as a direct competitor given the typical profile of systemic patient, but we are seeing movement to add to either a combination or switch to topical regimen completely in lieu of an oral treatment. While we don't have great ideas about exactly the severity of patients we're treating, we do anecdotally know that the patients we have treated have been across spectrum, mild, moderate and severe. So let's move to the next slide, which is Slide 13. And of course, the only way to truly access all of these opportunities and patients is really with our pricing and access strategy. I want to reiterate our goals with respect to access and coverage is that our appropriate pricing philosophy is designed to garner high-quality access with fewer steps or prior authorizations as well as more rapid formulary adoption. These 2 will ultimately play hand-in-hand in accelerating uptake and preserving gross to net as the time we must cover that cost of medication is reduced as that shifts to third-party responsibility. We've been also pleasantly surprised that roughly 1 in 4 patients have had open access to ZORYVE in these early stages of launch. And as we've been messaging, the meaningful jump in that number will come with continued major formulary wins. Remember that these are independent decisions made by health plans to provide that coverage even in some cases, ahead of the parent PBM contracts and results in formularies. Now we've had some investors voice concern in the past about a responsible pricing strategy would leave us disadvantaged, frankly, on access versus a higher price, higher rebate playbook. And I think the announcement of our first major formulary coverage decision is incredibly exciting for ZORYVE and for patients and also validating to our differential strategy. Now while the ink is still drying on the most recent formulary wins, we're very much diligently working toward -- with our new partners so that we can articulate more details in the near future about future wins. Just some more details on what Frank started on is that we have now fully executed agreements and we have received favorable coverage decisions for the inclusion of ZORYVE on the formulary of a top benefit pharmacy benefit manager as well as a large national health plan with each currently inclusion expected at the beginning of November. The important distinction here is that these are not merely signed contracts, but true formulary coverage. Given the timing of our earnings call today, we thought it'd be very important to share this with you and we'll be able to communicate more details about the quality of coverage very soon, but I will say we're very happy with the differentiated value attributed to ZORYVE from payers as it relates to reducing prescriber burden. On the very next slide then, let's get into some prescribers' feedback. So I am now on Slide 14. So at this point, it's a little too early in the window to run for the entire field survey. But in our quick cold survey, it's just that the feedback is very good in terms of understanding current and future intent to prescribe. And the patient initiations month-over-month are nearly doubling in terms of position intent. And the feedback from the field from physicians who have used ZORYVE continues to be incredibly positive. What also highlighting the most of us often are about the profile are the following. Now many have been very pleasantly surprised with the rapidity of effect. We saw in our trials only needing 8 weeks to get to the endpoint to get to a 40% IG success measure, but Patrick showed earlier this year that nearly every patient in the DERMIS study responded to our product and nearly 3 in 4 patients achieved a clinically meaningful response. This is in contrast to prior experiences with this particular MOA and has really opened a lot of eyes as we solicited feedback. We also see examples of ZORYVE's ability to punch above its weight at the more severe end and treat those top blocks. Again, for us, we weren't that surprised. We saw this in the trials. And we saw when we break out our IG success by our service area, we actually had numerically higher efficacy rates at the higher end of severity inspection of DSA. Now of course, we coupled us with the unique ability to treat the intertriginous areas. And remember that we're the only label topical agent with this in the indication statement. This will be -- which will continue to be a major innovation point for us in treating patients with this type of disease. Again, we're the only agent here that demonstrates efficacy in addition to tolerability for these patients. Also itch, early meaningful response to itch, again, coming from patients, it has been one of the largest complaints and that release of itch is often the first sign to the patient that the drug is working even ahead of flat clearance. Finally, we know how well tolerated this drug is from the clinical experience, and we continue to hear consistent reports of this while in the field. This continuous feedback reinforce and really trump at the safety profile around ZORYVE more and more positions trial and gain experience, solidifying a key differentiation point for the product in the psoriasis topical treatment landscape. Moving to Slide 15, my last slide here. We talked about back in March, some of the critical success factors for launch. In acknowledgment, obviously, net sales realization would take a little bit more time given the payer coverage decisions. But we have shared some of these metrics already, but we really continue to focus on these 3 pillars of driving the start of our awareness and use, the patient experience and of course, the broad high-quality assets, which we've spoken to a lot about today. We've seen a number of unique writers continue to accelerate here and launch with well over 1,300 unique writers and certainly good reach from our sales team hitting well over 80% of the high-value targets, meaning around 9,000 HCPs in total. We are seeing some refills go up for recitations and also patient awareness rising. And then lastly, just the piece of that, again, the high-quality access that we've spoken about with today's win. So with that, I'm going to pass it over to Patrick for our clinical update.

Thanks, Ken. I'm on Slide 17, and I'm just going to touch on some accomplishments and upcoming milestones for us. But first, I just want to echo the remarkable list of accomplishments that we have here in the third quarter that Frank mentioned. And I want to give credit to the entire team that was supporting our R&D efforts. And touching on that top milestone, the FDA approval of ZORYVE, Ken has already spoken about the progress of our launch. But I think it's also important to note that dermatologists like myself, we've been waiting for this moment of meaningful innovation in the topical space for decades. And there's really a palpable excitement that only continues to grow as patients and physicians garner experience with ZORYVE. They're being out in the field and being at some of the medical meetings and hearing how this is changing dermatology. I think you can feel a real shift in the field and it's very exciting to be a part of that. So moving on to what we've done in the third quarter. It's been a great quarter for our phone program as well. In the third quarter, we released our top line Phase III ARRECTOR data in September. I'm going to touch a little bit on giving more data out there than what we had just in the press release. In addition for foam, we had the opportunity to present the STRATUM Late-Breaker at the European EADV meeting. STRATUM is our Phase III seb derm study. And did a fantastic job of being able to present this for us and got a really nice response and some great awareness for our data in seborrheic dermatitis for the foam product. Moving on to cream. As you know, we've completed enrollment in the INTEGUMENT-1 and INTEGUMENT-2. These were done in August and I'll talk a little bit about the progress of these programs moving forward from here. And finally, our dermis data were published in the Journal of the American Medical Association. This reflects the hard work of our team and some of the fantastic investigators that we've worked with. This builds upon the Phase II publication in the New England Journal of Medicine and now to have our Phase III studies published in JAMA, I think, really highlights the importance of these trials to medicine as a whole, given that these are really journals that move outside of dermatology as well as within dermatology. So we're very excited to have seen that. So moving forward into the milestones that are ahead for us. As mentioned, we completed enrollment INTEGUMENT-1 and INTEGUMENT-2. So these are ages 6 and above. We plan to have top line data before the end of 2022, as Frank mentioned. And in addition, other big milestones for us with regard to progressing our pipeline, we have ARQ-255. So this is a program where we've developed a unique drug delivery technology that gets our JAK inhibitor topically to the base of the hair follicle. This is where the site of inflammation is located. Right now patients with alopecia areata really only have access to systemic options. And so having a topical program would really represent an advance for these patients. So we're going to move this into the clinic before the end of the year and we're hopeful that this will prove out this technology in the clinic. We'll be able to move that program forward beyond that. With regard to the seborrheic dermatitis program, the next step for us is to submit the NDA. Our team is feverishly working to get the NDA and that's planned for quarter 1 of 2023. And just to remind you that the review time on that will be a 10-month review similar to what we had for ZORYVE cream in psoriasis. Marking our action date for Health Canada, we expect to hear back from Health Canada for around April 30 of next year. That will be important for us extending beyond just the U.S. And then coming back to the cream atopic dermatitis program, our other data coming in ages 2- to 5-year-olds from the INTEGUMENT-PED's trial, we plan to have top line data in 2023. So as mentioned, this is 2 to 5-year-olds with a 0.05% cream. And then we'll advance off of that top line data in INTEGUMENT-1 and INTEGUMENT-2, and we plan to submit an SNDA for roflumilast cream in ages 6 and above. This is with the 0.15% cream also in 2023. So moving on to Slide 18. Again, just to give a little bit more data on our ARRECTOR Phase III studies and the results that we saw there. Here, we see a schematic of the study design. We enrolled ages 12 and above. Now we looked at the co-primary endpoint of scalp and body IGA in this trial at week 8. And so we enrolled a population of at least moderate severity on the scalp. That's the scalp IGA, and they had to have a mild severity on their body. That's for the body IGA. And they had to have at least 10% of scalp involvement. We enrolled 432 subjects, randomized them 2:1 active versus vehicle. Just a reminder that the foam is a highly related formulation to ZORYVE cream and also is at the 0.3% dose, which is the same one that we're -- it's in ZORYVE cream currently. Not to give the ending away right at the beginning, but we met our primary endpoints, co-primary endpoints of scalp and body IGA as well as all of our secondary endpoints in this trial. So a really robust data set coming out of these 432 patients. Moving on to Slide 19. You can see the -- one of the primary endpoints here of scalp IGA, that's Scalp Investigator Global Assessment. We got 2/3 of patients to scalp IGA success by week 8, which was the end of treatment. But kind of looking at the earlier responses and showing the rapidity of response, we see that 1/3 of patients already at week 2 were IGA success on the scalp and half the patients with just 4 weeks of treatment. Now importantly, many of these patients are actually getting all the way to an IGA of clear, which means they have no disease on their scalp. We got 40% of patients to a scalp IGA of clear at week 8, which is a really remarkable success rate. Moving on to Slide 20 and the body IGA. So this was the same primary endpoint that we had in DERMIS-1 and DERMIS-2. And in fact, the results that we see now with the foam show that the results are similar to the cream, even a little bit of an uptick on that week 8 time point -- on that week 8 results. We had about 40% of patients from DERMIS-1 and DERMIS-2 with the cream formulation. Here, we're just about 47% of patients. And keep in mind that with these co-primary endpoints of scalp and body we're also treating intertriginous disease. This is a treatment that really covers the entire patient from the top of their scalp all the way down to their toes intertriginous as well. So this really is the potential to be a simplifying treatment for patients with psoriasis. And that would make it quite a unique product in the market if approved. So moving on to Slide 21. Ken highlighted the importance of itch in patients with psoriasis. This is very true of patients with psoriasis and even more so of patients with scalp involvement. We know that scalp itch is incredibly problematic for patients. It's bothersome, but it can also lead to hair loss and addressing this symptom has a really big impact on quality of life. And so the result of the ARRECTOR study is just another one showing the benefit of roflumilast in itch. We've demonstrated this previously with psoriasis and also in seborrheic dermatitis. On Slide 21, you can see that by the week 8 endpoint patients on scalp itch, again, focusing just on scalp itch here, we also assessed whole body itch in this trial. We'll show those results later at a full medical meeting. We shot 67% of patients by week 8 to success, meaning they had a 4-point improvement which is what's required by the FDA for labeling of itch endpoints. So -- and about 1/4 of patients already at week 2, showing that same 25% level on that same endpoint of 4-point response. So again, rapid response on itch and getting a high proportion 2/3 of patients to success by week 8. Turning now to safety on Slide 22 for the ARRECTOR study. What we're seeing with the roflumilast foam program is a very similar tolerability profile to what we're familiar with from the ZORYVE cream studies. We see overall AE rates were low and consistent with prior studies. We had balanced subjects with serious adverse events was 0.7% in both active and vehicle. And most importantly, and I've presented a lot of results and you'll always see me coming back to this discontinued study drug due to adverse event. I think that this is a really important metric for overall tolerability. And here, you see this is balanced with only 1.8% on roflumilast and 1.3% on vehicle. So that demonstrates again that patients in our studies are not discontinuing due to adverse events at really significant levels. So that's a very positive sign for overall tolerability. Moving on to Slide 23. The safety profile here, showing all treatment-emergent adverse events greater than 2% in any group. What you see is that really the only outlier compared to our previous data with psoriasis is COVID-19, which is coming in balance between roflumilast 2.8% and vehicle at 2.6%. The other 3 adverse events listed there were all listed as ADRs in our psoriasis program. But interestingly, we had about 3% diarrhea in our psoriasis program with the cream formulation. Here, that number is about the same, but the vehicle is now coming in at 2.6%. So that's an interesting observation just between the 2 of those. Just a little bit more data then with seborrheic dermatitis. These data, as I mentioned, were presented at Milan at the European EADV meeting. Dr. Andy Blauvelt did a fantastic job presenting them. Just wanted to highlight a little bit of them here because it really rounds out what we think is the opportunity for patients with seborrheic dermatitis. This is a disease that has been -- has almost no development ongoing in the past 20 or 30 years. And roflumilast foam at the same concentration as we studied for the scalp really showed some remarkable data. So what we see on Slide 24 is that 80% of patients achieved IGA success at week 8. And already 40% of patients got to IGA success at week 2, kind of echoing the same pattern of an early response, a rapid response in patients even at earlier time points. But importantly, over 50% of patients achieved IGA is clear at week 8. That means that these patients had no evidence of seborrheic dermatitis in their scalp at week 8 when they completed treatment for the study. Some new data on Slide 25 that we added in from that EADV presentation are just really touching on 2 key signs of the disease. Along with the symptom of itch, they really round out some of the major impact of this on patients. That is erythema as well as scaling. And here, we're looking at achieving an erythema or scaling of 0. So again, there's no scaling left on these patients, and again, really good numbers, so over 50% of patients achieved erythema of 0 at week 8 with an early response of almost 1/4 of patients and similar results, similar numbers for patients for scaling as well. So I think this really kind of gives an idea of the strength of the data that we have in seborrheic dermatitis. As I mentioned, we're moving forward with this NDA and we're looking to have that to the FDA in the first quarter of 2023. So just one last slide for me on Slide 26. And this is about our upcoming readout for the INTEGUMENT studies. We know that folks are really eager for the readout of this program. And just wanted to touch on a couple of points. As you know, we've completed recruitment. We're very close to a readout here. These were large studies, over 650 subjects in each. And just to remind everybody, this is ages 6 and above, and this is with the 0.15% cream being applied once daily. And we powered these studies -- size of these studies based on really 2 factors. One is the size of the safety database required to really provide safety data for our submission. But also, we wanted to have very strong statistical power on the primary endpoint. So based on the 650 subjects, we have greater than 95% statistical power to determine the same difference between active and vehicle that we saw in our Phase II trial. And this gives us about 10x as many patients in the active arm as we had in our Phase II study. And this really, I think, puts us in a very good position for this readout. Probably overpowered for the primary endpoint, but gives us better power going down into our secondary endpoints, which can be important for us to be able to really get the broad label in mild to moderate atopic dermatitis that we're looking for. So with that, I'm going to turn it over to Scott to cover our financial results.

Thanks, Patrick. We had a couple of very important and exciting financial milestones in the third quarter. First, with the ZORYVE launch in August, the quarter represents our first as a revenue-generating company. And second, we were able to bolster our financial strength in the quarter by raising an additional $285 million on the back of the psoriasis approval leaving us very well-positioned to continue investing in support of both the ZORYVE launch and the continued progress of our pipeline. Turning to the financial results for Q3 on Page 28 of the slide deck. Net product revenues were $725,000 for the quarter. The revenues were driven roughly equally from end customer demand in the quarter as well as the expected initial wholesaler inventory build. Our gross to net discount rate in the quarter was high as expected, given we are still working to secure payer reimbursement, but our discount rate was materially better than other recent branded topical launches given our differentiated pricing and access strategy. We expect modest improvement in the gross to net discount rate in the fourth quarter given the timing of our recently announced formulary coverage with continued progress on delivering more value per script expected throughout 2023. We also expect continued demand growth as the launch accelerates and more formulary coverage is added for ZORYVE. Cost of sales was approximately $270,000 in the quarter. We paid a $7.5 million milestone payment to in the quarter related to the FDA approval of ZORYVE. This payment was capitalized and will be amortized straight line over 10 years to the cost of sales P&L line. So that amortization charge for Q3 has an overweighted impact on our cost of sales percentage in the quarter given the modest revenues. We continue to expect our cost of sales margin to be pharma like in steady state, inclusive of this amortization charge. Research and development expenses were $70 million in the quarter. We incurred a $30 million upfront charge related to our acquisition of Ducentis, which essentially accounts for all of the change in R&D expense on both a year-over-year and quarter-over-quarter basis. Recall that we paid about $16 million in cash for Ducentis and another roughly $13 million in our acute shares. Normalizing for the $30 million Ducentis charge, we expect the R&D line to stabilize going forward. The wind-down in costs from our pivotal studies is counterbalanced by the ongoing cost of the pediatric atopic dermatitis study in the long-term extension study, the regulatory and manufacturing activities associated with the upcoming launches in new indications and the progression of our next set of topical and biologic pipeline opportunities. SG&A expenses were $35 million for the quarter, increasing largely due to the higher commercialization expenses for the ZORYVE launch, including the hiring of the full sales force. We expect modest continued growth in SG&A as we continue to invest in the psoriasis launch and the upcoming additional launches. Net loss per share was $1.89 for the quarter versus $1.14 for the corresponding quarter in 2021. The Ducentis acquisition contributed $0.51 to this quarter's net loss per share. Turning to our final slide on Page 29. We provide some key balance sheet and cash flow items. We continue to operate from a position of balance sheet strength with cash of approximately $480 million as of September 30. Our cash flow used in operations for the quarter was approximately $68 million. This does not include both the onetime cash payment of $16 million for Ducentis and a $7.5 million milestone payment to AstraZeneca as both of these items were classified as investing cash flows. Average shares outstanding for the quarter were $57 million, which includes the newly issued shares from our August equity offering as well as the newly issued shares from the Ducentis acquisition. Our quarter ending shares outstanding were approximately 61 million, which may help you in modeling accurate go-forward share count. This concludes the financial update. I will now turn the call back to Frank to wrap up our prepared remarks.

Okay, Scott. So thank you for listening to the prepared comments, and I think we're going to now transition to a Q&A system. Back over to you, Eric.

Yes. Chris, can you open lines for questions?

[Operator Instructions]. Our first question comes from the line of Ken Cacciatore from Cowen.

Real exciting time. I know big major data coming up. But I wanted to focus on the ZORYVE launch and some of Ken's comments. You really are taking a different approach here versus your competitor. And Ken hit on some points -- actually, I wrote one of them down, which was in just saying we're doing it without accelerants, which is a new term, but I think very descriptive. But maybe you guys could take some time and Ken review a little bit of why it's so important you're taking the strategy that you're taking, why you are not being a bit more aggressive on sampling and buy-downs? And what does that mean in terms of your preservation of long-term value? And I guess a corollary to that is, as you approach the strategy, you talk about these nice contract wins. Can you try to contextualize -- is it the value that you thought in these first contracts? So is it validation early on that strategy? So just wanted to hear a fuller articulation of your choices versus theirs?

Sure, Ken. Great question. So I'll try to break them apart, starting with the accelerant. So I think there are many ways to fuel Rx growth obviously, organic demand built on the backs of their clinical profile. But there are many things that one can do to enhance your shift trends. And we've seen that with other products out there where they better buy down opportunities, very, very long the packets, cash offers, things that have -- don't really represent, I think, sort of the long-term sustainable type of demand that you won in the sense that at some point in time, that will have a material impact to your gross finance. And we've seen kind of learning from the past, we've seen some companies that have gotten deep and tolls and sort of ultimately cease to exist as an organization based on their inability to claw their way out of these scenarios. So that was kind of the approach we're taking. It is very different. And I think, obviously, it remains to be seen. But we're very confident in the sense that even without generating kind of this massive uptake at the beginning and sort of the value proposition of our clinical profile was very clear. And the decision to cover us, both at the PBM and planned level, they could see our proposition, our value, our clinical profile and the approach we were taking and sort of I think we were rewarded for that. So we did not necessarily have to take the traditional generate volume in all costs and then rebate massively off of a very high price to try to secure access. So it is a different playbook. We're very happy that we're able to report today the output of that. But it really just must learned there in terms of we don't necessarily have to take that route. The other thing that we think about is kind of the sustainability of our pipeline. And in order just to get to those other milestones or launches, we have to be in a financially stable position. So this is something that we thought about in terms of how do we do this methodically and in a controlled manner without again digging ourselves into a hole and putting ourselves kind of behind the 8 ball on that front. So these are important factors we think about in terms of future launches and sort of what not to do. I think the last thing is what you will see is with some of these sort of tactics that are used to generate volume early on, whether you're talking about in this category or others, almost universally, they are pulled back. So one of the frustrations of physicians that we heard very amount and clear was, please don't beat and switch us. Please don't put out something and then have to walk that back. And then ultimately, our credibility with patients is on the line. I think that's one of the key learnings that we really built on having as many dermatology clinicians and houses we do is that understanding of don't put out something that then you have to pull back. And we've seen other products or other companies that sort of have these strange transitions when they're trying to walk back certain things they put out in the market, which then causes disruption and what consists of like nonlinear growth contents, right? So this is something that we're very conscious of. And we hope to continue to build on the momentum that we have today with respect to the payers and them seeing the value without necessarily adopting that classic high-priced, high rebate approach. Sorry, did I answer your question? I hope I did.

It did. You did. It was very comprehensive, and congrats on the progress.

The next question comes from the line of Seamus Fernandez from Guggenheim Securities.

So just two quick questions. Just from an expectation perspective, wanted to just get a sense of as it relates to the data that have been presented so far in AD and the data that were presented in your presentation of the FDA's endpoint. Just wanted to clarify as we speak with investors, some are kind of looking at the difference of 1 or 2 point change rather than the 1 or 2-point changed with the 2-point differential as the primary endpoint. And just wanted to make sure that that was clarified for investors in terms of what you guys saw in your Phase II results and maybe even provide the slide to refer back to from your 2020 presentation. Just because I think it's important that people have the sort of right metrics in place. Separately, just also wanted to get a sense of what you guys actually think the AD data means for your potential to perhaps more aggressively promote ZORYVE cream heading into the potential approval of that product. Would you change anything related to your promotional strategy at all with regard to couponing and getting more aggressive with the experience that physicians are gaining with ZORYVE? Are you happy with the experience that they're gaining in psoriasis and just looking forward to the new indication? And then just the last question was really, congrats on the early formulary win here. Can you just clarify, is the competitor product TAMA also on formulary? Or are you guys exclusively the product as the formulary win there? And do you see additional formulary wins in the relative near term that could surprise to the upside?

There's a lot of questions, Seamus. Okay. We're going to turn it over to -- we'll turn it over to Patrick to address your first question about the INTEGUMENT.

Yes, Seamus. Happy to kind of make it very clear what the endpoints are there. So the primary endpoint for INTEGUMENT-1, INTEGUMENT-2, and INTEGUMENT-PED is IGA success. And so when we're enrolling mild and moderate patients, those patients need to have a 2-point improvement and get to clear or almost clear. So clear, almost clear means is 0 or 1, mild and moderate on the IGA is 2-3 and severe, which we're not enrolling into these trials, would be 4. So that means that a patient who comes in at a mild needs to get to clear in order to meet that IGA success criteria. The other endpoint that you had mentioned, which does appear in much more communication around this trial because it really is the easiest one to communicate to patients because there's 2-step improvement and to doctors. The 2-step improvement involved in the IGA success can sometimes be a little bit trickier people to get their heads around. Whereas when you're talking to a patient or a physician, you say, listen, we're going to get this patient to clear or almost clear. They know what that means. Clear means they don't have any disease and almost clear means they have very little and processible disease that's remaining on them. So just kind of coming back to our data, we showed about 50% of patients between the 0.05 and the 0.15 in our Phase II study, getting to clear or almost clear and around a 30% vehicle rate on that endpoint. For IGA success, 0.05 and 0.15 were both around 37% to 38%. And so the vehicle also there demonstrated 22% for IGA success. So it was that 15% difference between -- on the IGA success that we use to power our Phase III studies because our expectation INTEGUMENT-1, INTEGUMENT-2 is that we'll be able to demonstrate similar efficacy to what we've shown previously. And just to confirm, our expectation is not to somehow reduce that vehicle rate. We think that's an important intrinsic part of our product. So with that, I'll turn it over to Ken to address the latter part of your question.

Yes. So Seamus, good to talk to you. So I'm going to try to tackle the question regarding kind of more aggressive promotion with respect to atopic dermatitis. So clearly, we're a learning organization and I think many things are up for grabs. One thing I'd point you to, though, is obviously the temporal nature of our launch is AD is a little bit farther out and we'd have to sort of understand the landscape with respect to coverage. As you know, with add-on indications, sometimes you're able to kind of leverage the decisions made on earlier products in the portfolio. And if that were the case, you could certainly imagine a different approach, owing to the fact that we have several quarters under our belt with the sensor earnings and be in a different position to maintain kind of sustainability. So I think the shorter answer is, it depends and I think we would reserve the right to kind of dial up and dial down the level of sort of the tactics and approaches we could take. And certainly, I think the competitive intensity would have something to do with that as well. So I can't tell you that we will [indiscernible] other than to say all eyes -- all things are on the table. But clearly, the access picture and kind of where we are as an organization given the downstream launches would play a role in terms of how "aggressively" we would play that. Now with respect to the formulary, I only speak to us. I think we're still working with our partners to sort of get to the point where we'll fully disclose the details. But I will say that once that comes out, you will have a better picture of kind of the situation we're in. That look for those details soon, but right now we're not at the point where we can sort of fully disclose the position only that we are covered on the PBN and the national level.

Our next question comes from the line of Vikram Purohit from Morgan Stanley.

So from our side, both on the ZORYVE launch. So first, on inventory, what's the typical steady state of inventory you'd expect to have maintained for ZORYVE in the coming quarters? And then secondly, at this point of the launch, do you feel like you've seen enough kind of patient experiences at this point to understand how many tubes per year might be reasonable for people on ZORYVE to kind of work through on an annual basis?

Sure. Vikram, it's Scott. Good to hear from you. On your question around the wholesale inventory piece, it was certainly noticeable, I think I mentioned in my prepared comments, about half of the sales in the quarter related to the build. I think I would just say that we don't expect it to be a meaningfully -- a meaningful contributor. We expect the pickup in demand-driven strips to be the main portion of sales going forward. Now you've probably seen from other companies, wholesale inventories do fluctuate. It's just hard to predict these things. And so we'll be sure to call out when wholesaler inventory impacts the sales in the quarter. But again, the proportion we saw in Q3 was driven by the initial build-out launch. I'll hand it off to Ken to talk about your second question.

Yes. So refill rates, still very early in launch. And so I don't know that we have any confirmatory or data that suggests that we would back off of our earlier comments regarding the 3 to 4 tubes. I think it's very early days. The vast majority of patients have really only received their first tube. And so in many cases, depending on the body surface area that too can last 2 to 3 months. So it will take some time. What's encouraging is that we aren't seeing refills. And again, that's always confirmatory feedback that the patients have a lot of experience. They're seeing the efficacy they're looking for. And really, those are good signs, but -- and we feel good about our tube guidance at the moment. So probably far too early to change that assumption.

Our next question comes from the line of Louise Chen from Cantor.

Congratulations to all success this quarter. I had a few questions for you. So first one I had for you was that I know there has been a lot of focus on the initial launch prescriptions and it's probably too early to draw any conclusions here on peak sales potential. But when do you think you'll actually hit your stride here? And then second question I had for you is physician feedback on ZORYVE. Why do people like it? Why are they prescribing it? What drugs are they switching from? And then last question I had was just on AD. The INTEGUMENT-1 and 2, are you filing with that data? Or are you going to wait for PED?

Sure. Hey, Louise, it's Ken. So I think what we said earlier was we think that the momentum that we have, coupled with the payer access coming into play will really help be that inflection point. I don't know exactly -- I don't know if you're asking me when hitting stride, what stride means, meaning like peak. But I think that we're hitting on also is at this point. And clearly there's a few more -- there's still more work to do with respect to the payers. So today is a great marker for us, but we've got many more wins to sort of fully unlock the potential. And really, we really think that the reduction in prescriber burden is really one of the biggest keys to the success and widespread adoption of our products. So until that work is done, it was hard for me to say we sort of like hit on all cylinders that we're running at full speed quite yet on that. So I think that's really the marker that you should then look to sort of see if we're executing fully. With respect to the feedback on the drug, I mean, I think I mentioned earlier, there's been a lot of positive feedback. We've been out in the field quite a bit, listening, learning. And I think earlier in my slide deck I talked about the products from which people are switching from. So I think on Slide 12 in the deck, you can see there's a whole host of products in there. Again, the majority of which is what we would assume, topical corticosteroid that sort of the goal, I think all the products that newer topical products are sort of gunning for that same topical corticosteroid market. But you are also seeing some of the both newer branded products as well as some of the alternative steroids like vitamin D and calcineurin inhibitors being displaced as well. So there's a pretty healthy mix. There's no one thing. Again, the overwhelming modality from which people are coming from is topical -- are topical steroids. Patrick, anything else to add in terms of the feedback or what else you'd be thinking about using?

Yes. I mean the only thing is I would say, just from our kind of discussions with dermatologists and other health care providers right now is it -- we're hearing it not from like a single type of patients. So it's not really -- we're not seeing it being niched as like the intertriginous drug or something like that. We're hearing broadly patients who are being planned to be put over on to a biologic. They're putting some patients on to this, on to ZORYVE. We're hearing a lot of patients switching over from topical corticosteroids. And so I think that the breadth of where those patients are coming from is really supportive of the clinical profile that we saw. It is strong enough to work on knees and elbows, but it also is able to be used on some of the more sensitive areas like the face and intertriginous. And that's something that is very differentiating, especially to the topical steroids for the vast majority of patients out there. Yes, Louise, I'll take the third one as well, which is about our AD submission plan. So we're planning on reading out the INTEGUMENT-1, INTEGUMENT-2 studies, as mentioned, those will come before the end of this year. Our plan is to make a supplemental NDA to the cream for ages 6 and above, which will include just the data of those ages. So we will not be including the INTEGUMENT-PEDs trial. That's at a different dose of 0.05 and ages 2 to 5-year olds. So we would move through the submission and approval for ages 6 and above. And then after gaining that initial approval, then we would come back with another supplemental that would take the data from ages 2 to 5 and extend the label into that lower age group. That's our plan right now.

Our next question comes from the line of Chris Shibutani from Goldman Sachs.

This is on for Chris. We have one on ZORYVE and then one of the upcoming Atopic Derm data. On ZORYVE with the recent formulary and PBM wins, can you speak to the percent of covered lives on a national basis? And then for the INTEGUMENT studies, the Phase III studies are recruiting a slightly younger age than was studied in the Phase II. Can you just remind us what went into that decision and how you expect that to affect the ultimate outcome?

Steven, this is Ken. So we won't be speaking to covered lives today. Look for a future announcement on that front with all the details once we work through with our partner. So that's not something we're announcing at this moment, but hang tight on that one. Patrick?

Yes. So with regard to atopic dermatitis, the difference in the ages. In our Phase II study, we studied down to ages 12 and above. This submission for INTEGUMENT-1 and INTEGUMENT-2 and the upcoming data readout will be ages 6 and above. So we don't really see this as a significant risk to the program. When we've looked over other data from both PDE4 inhibition in atopic dermatitis, topical treatments as well as systemic treatments, we're not really seeing how patients across these different age groups are responding differentially to therapies. And in particular, AD treatment with PDE4, there's a lot of history there that really gives us support that we anticipate the similar kind of effect even going down into those younger age groups. So we're very confident about the consistency of our results and especially with this next readout, we're only extending the age from 12 and above down to 6 and above.

Our next question comes from the line of Uy Ear from Mizuho Group.

So I guess my first question is, I think you previously mentioned that depending on how quickly you can analyze the data, you're not committed to reading out INTEGUMENT-1 and 2 at the same time. Just wondering if this is still true. And I guess my second question is, could you sort of help us understand why you wouldn't decide not to submit, I guess, the ARRECTOR data and the STRATUM data for the foam formulation at the same time? Is it primarily just because of the speed and analysis? Or is it something else? Because it seems that waiting a couple of months, it's probably better than maybe 10 months or more, I guess. And my third question is, given everything that we know today, particularly with respect to the formulary win, could you sort of help us understand a little bit what you think the gross to net could be next year?

So Patrick, do you want to maybe take the first 2 and then Scott, you can address the GTM. Thanks for the question, Uy.

Yes, this is Patrick. So yes, as you know, we ended recruitment in INTEGUMENT-1, INTEGUMENT-2 about 3 weeks off from each other in August. And so our expectation is that that differential in the readout will continue through kind of the final data to top line. And so our plan is not to hold the 2 studies to be read out together unless something were to happen, which would cause them to be closer than the current 3-week separation that they had coming into -- through the recruitment. So that's our plan right now is that if that continues, that we would read one out and then read the second one out separately. With regard to the timing of ARRECTOR and STRATUM and kind of foam submission. Our feeling, given the differential in the time between when we read out the seb derm data and scalp psoriasis, especially with seborrheic dermatitis being an indication where there really hadn't been any development going on and patients are very much waiting for this treatment, we hear that when we talk to investigators, we hear that when we talk to patients who were in the trial. We felt that holding that at all really wasn't best for patients and really wasn't best for us as a company as well. So we're going to move straightforward with getting the seb derm submission in. And then as quickly as possible on the heels of an approval there that we would file a supplemental for the scalp psoriasis.

Yes. I would just -- maybe I would add, I think Wall Street still does not appreciate just how big an opportunity seborrheic dermatitis is. I think the level of excitement in the dermatology community about the foam in seborrheic dermatitis is probably the highest of any of our indications. This is a disease that has been almost entirely neglected for 40 years. Patrick and Ken and I were out in the field last week and we heard consistently that dermatologists are seeing more seb derm patients than psoriasis patients every day. They are pun intended foaming at the mouth for the foam for seborrheic dermatitis. And so as Patrick said, we didn't think it was right for patients or for the company to hold that submission by a single day. We want to get it out as quickly as possible so that we can start helping dermatologists treat their seb derm patients. And I think Wall Street will start to realize just how big an opportunity this is for us for 154 in seb derm.

Scott, do you want to…

Yes. Thanks a lot for the question. So looking at Q3, if you triangulate between the commentary that we made on the inventory build and then the demand -- the script demand data that you see week to week, I think you would come to a gross net range in the quarter of about 70% to 80%. So that's for Q3. When we look ahead to Q4, very exciting announcements we made today around the formulary coverage. I would say that given the time kind of within the quarter that it occurred, the improvement in gross to net for Q4, the expectation there should be relatively modest. But then when we get into 2023, I think we're on a good path. We expect additional formulary coverage to take hold over time. And so that would put us on the path to -- I think what we've talked about in the past is, call it, 40%, 50% long-term gross to net discount rate. And that, hopefully, I think we've given a base case of maybe 12 to 18 months from launch. Obviously we're doing everything we can to accelerate it. And the announcement we made today is a good down payment on that.

Our next question comes from the line of Greg Fraser from Truist.

I wanted to ask about the feedback. Curious, specifically for feedback that you've been hearing from docs that have been prescribing the other new drug in the class B TAMA. And on the switching, what are the reasons that you've heard for docs switching patients from the TAMA? Are the switches happening for efficacy reasons or more about side effects? Any color there would be helpful.

Yes. So I would just say we don't have any direct feedback from doctors on why they might switch from 1 drug to another drug. The switching data we're getting through secondary sources, yes, I don't know that there's a whole lot more we can say about that at this point in the game.

What about feedback from docs?

Well, I mean, in terms of feedback, I think what we've heard very consistently is that they're impressed with the rapidity of ZORYVE's effect and the efficacy that they're seeing on -- particularly on tough to treat plaques. And then the thing that we really never hear about is any tolerability issues with ZORYVE. And I think that that is a significant difference from really every other topical on the market. Every single topical product they have other than ZORYVE is associated with fairly significant local tolerability issues, whether that's steroids or TCIs or vitamin D or vitamin A or any of the other products. And so I think doctors have been very pleasantly surprised at how well patients tolerate ZORYVE and that's been something that's come up very consistently in our discussions with users.

Our next question comes from the line of Serge Belanger from Needham.

A couple of quick questions. I guess for Ken on the coverage of ZORYVE. I know it's only been a couple of months since the approval and the launch. But curious if your initial assumptions of being at steady state coverage and gross to nets of 40% to 50% within 12 to 18 months are still intact? And then secondly, since ZORYVE is launching and competing directly with another topical product for the same indications, should we expect to see some exclusive formulary wins for either ZORYVE or the other products?

Sure. So start with the first question. So I think Scott said earlier, we do expect within the time frame that we've talked about before 12 to 18 months that we would achieve that sort of steady-state growth that industry-wide, the benchmark is about 50%, which would represent great performance, frankly. And so we're on the way to that path in terms of achieving that. So I think the timing has been excellent in this case. I can't really talk about when those [indiscernible] will come. But certainly, I think it's validating the [indiscernible] trying to accelerate that. It would be perhaps atypical for a product to come out and receive that kind of coverage that quickly. So we are pleased, but it's certainly -- I don't know that you can sort of read that through that sort of the next one and the next one quite yet. So I'd say 12 to 18 months is very reasonable. With respect to kind of exclusivity in general, I think payers are typically loath to give exclusive contracts or try to lock out on other products early in the lifecycle. You tend to see that a little bit more in more mature markets or when there's sort of a clear incentive to do so. So early on, I think payers are watching kind of the volume uptake, the way in which that volume is generated. And also, I'm kind of looking for those dynamics. And then ultimately may cost that out. And we've seen this in other competitive markets in derm, biologics space, in particular, we see a lot of the activity, but it's often not quite at the beginning. And so again, they also don't necessarily want to pick the wrong horse, so to speak. So you typically don't see that. And I think generally, companies aren't looking to sort of bid for the access either very early in the launch. So I would not expect to see that emerge too quickly.

I would now like to turn it back to Frank Watanabe, CEO, for closing remarks.

Okay. Well, I know we're a little over time, so I'll keep it brief. I just want to thank everyone who joined us on the call today. Thanks to all the people who had some very probing questions for us. And I also wanted to take just a moment to thank the Arcutis staff and we started off by talking about everything that we've accomplished in 2022 and in Q3 and we would not have been able to accomplish any of that without the brilliance and hard work of the entire Arcutis team. Patrick and Ken and I just -- we're the front men, but it's the folks in the trenches who are doing all the work. And so I want to thank all of them for their hard work and their contributions in realizing our mission and bringing these therapies to patients. So thanks a lot for joining us and we look forward to talking to you all again next quarter.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.