Arcutis Biotherapeutics, Inc. (ARQT) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Arcutis Biotherapeutics, Inc. Fourth Quarter 2022 Earnings 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 note that today's conference is being recorded. I will now hand the conference over to your speaker host, Eric McIntyre, Head of Investor Relations. Please go ahead.

Thank you, Olivia. Good afternoon, everyone, and thank you for joining Arcutis' fourth quarter and full year 2022 earnings call. Slides are available on the Investors section of our website. 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, I'd remind everyone that we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. We encourage you to review their information disclosed in our latest SEC filings. With that, I'll hand the call to Frank.

Thanks, Eric. So I'm on Slide 5 in the deck, which is on our website, if you folks haven't downloaded yet. So 2022 was really a year of exceptional execution for Arcutis, and it really set us up for great success in 2023 and beyond. Just to recap, we had four successful pivotal Phase 3 trials readout, we had on-time approval for ZORYVE and plaque psoriasis, we raised over $300 million to secure a strong balance sheet to support our continued commercialization and advancing of our pipeline, and we continue to progress in building our pipeline. On Slide 6, we're making steady progress towards our vision of building one of the biotechnologies leading dermatology companies, some highlights from Q4 and other recent developments. With ZORYVE, we've got an innovative product that's really well positioned for long-term success with clinically meaningful benefits over alternative treatments. We're seeing very encouraging script growth as physicians gain positive real-world experience with ZORYVE. And we're also having great success in obtaining broad, high-quality access. We're delighted today to announce that we've received coverage from the second of the three large major national PBMs effective tomorrow. And Ken is going to comment a little bit more about the access situation, but we're really happy with our rapid prior and opining broad high-quality coverage for ZORYVE. We also continue to advanced additional indications for Topical Roflumilast Foam capitalizing on what is really turning into a unique pipeline in a product we had the positive readout from INTEGUMENT-1 and 2in atopic dermatitis. Very excited about the clinical profile in AD and the approvability of the product in a large and rapidly growing market. We also just recently submitted the NDA for Topical Roflumilast Foam and Seborrheic Dermatitis. And that sets us up for a potential approval late this year or very early part of 2024. And we've also already submitted a supplemental NDA for ZORYVE and plaque psoriasis down to the age of two, which will further read on the safety profile of ZORYVE and plaque psoriasis. We also continue to progress our early pipeline with the acquisition of ARQ-234, our first biologic for atopic dermatitis and the Phase 1b initiation of ARQ-255 in alopecia areata, which leverages our unique 4D technology and potentially could be the only topical treatment for alopecia areata. And finally, not only what we accomplish matters, but how we accomplish it matters to us as well. And so we're very proud that we issued our first ESG report in the fourth quarter, highlighting the progress that we're making on these important topics. If you move on to slide number 7, just a reminder of our broad and deep medical dermatology pipeline and the progress that we've made recently since the last call. On three programs, in particular, I call your attention to the three red arrows, highlighting some of our recent progress in advancing the pipeline with the NDA and Seb Derm, the initiation of Phase 1b for ARQ-255 and the acquisition of and progress on ARQ-234. Turning to slide number 8, there really are four keys to our strategy for the long-term success of ZORYVE. One is positioning ZORYVE to replace a significant percentage of topical steroids, which we're going to spend some time talking about today. Secondly, providing a positive clinical experience for doctors and patients when they use ZORYVE; third is obtaining broad, high-quality coverage; and lastly, is ensuring profitable growth through a rapid stabilization of our gross-to-net. If you turn to slide 9, I want to spend just a couple of minutes talking about the first of these four elements of our strategy. The important -- and I think it's really important for investors to understand that the key to realizing ZORYVE’s real potential is the conversion of a significant percentage of topical steroids over to ZORYVE. To give you some context, there are about 12 million prescriptions a year for topical steroids. That's something like 25 million every week versus 5,000 prescriptions, maybe 6,000 per week for ZORYVE and the other new non-steroidal combined. So we're really just tracking the surface in terms of the opportunity for ZORYVE. We believe that there are three critical elements for making that conversion happened. The first one is that prescribers need to see a need, a reason to change and move away from topical steroids. The second is that ZORYVE needs to provide a product profile that satisfies the needs of prescribers and patients. And the third one is it needs to be as easy to rate ZORYVE as it is for their next topical steroid. Thanks. That all sounds great, but is that possible? If you go to the next slide, to slide 10, we're showing here several different markets where you had a stable, mature and generic market and then an introduction of a new class of drugs. And what you can see in each one of these instances is that there is a very significant conversion over time as well as some significant market growth actually in a couple of instances, with the introduction of that new class of drugs. And so you're looking at examples here from the anti-coagulation market, the conversion from warfarin over to factor Xa, the schizophrenia market, the conversion of neuroleptics over to atypical antipsychotics, the GERD market with conversion of H2 to PPI. And then most recently, the conversion of the oral migraine market from triptans over to the oral CGRPs, which is still very early days, but you can see a very rapid conversion trend even in that market. If you go to slide 11, as you look across all these markets, and we're actually -- we were showing also the anti-depressant market and the conversion of TCA to SSRI. What you can see is over time, there is a very dramatic shift to the new class of drugs and that growth -- that shift continues throughout the life cycle of the product. And on average, about 50% of these markets all converted by year seven or year eight after the introduction of a new class of drugs. And when you think about those 12 million prescriptions I talked about, is 50% of that market converted over to new novel non-steroidal, I think that gives you some sense of the true opportunity for ZORYVE. So, if you move on to slide 11 -- sorry, I'm on slide 12. So I want to take just a moment and have Patrick comment on the first of these three elements around what we're hearing from the dermatology community about the need to shift away from topical steroids. Patrick?

Yes. As Frank mentioned, one key to moving dermatologists from topical steroids to newer non-steroidal alternatives is a recognition within the specialty that a change is needed. Recall last year at our Investor Day held during the AAD, we noted a change in the field regarding the surging interest in topical non-steroidal treatments. This has continued to build, fueled by multiple approvals, including ZORYVE across both psoriasis and atopic dermatitis. The derm community, with KOLs leading from the front, is educating that steroids were fine when there were no other acceptable options, but this has changed with the introduction of the new novel non-steroidals. They've noted the changing standard of care and raised questions about the clinical appropriateness of using topical steroids to manage these conditions chronically in the current environment. Another aspect is patient expectations. This is something we're hearing from the podium, but I'm also hearing it frequently from doctors, talking to doctors out in the field. Many patients are challenging doctors when they're presented with a prescription for topical steroids. Finally, we know that there is a movement to update treatment guidelines to reflect the new non-steroidal treatment options, and this is a favorable change as well. So taken together, we have leading dermatologists and key opinion leaders saying from the podium that's now become hard to justify the chronic use of steroids, given the well-documented risk of steroid side effects, such as stria, atrophy or bone fracture. I'll turn you over now to Ken Lock to update on the commercial progress.

All right. Thank you, Patrick. And let me pivot now to talk a little bit about launch progress and the commercial highlights in the fourth quarter of 2022. So moving on to slide 14. You can see our ZORYVE launch continues to build with steady and sustainable weekly prescription growth for our first full quarter of launch. And we've continued to build on the first quarter of 2023 here through the typical noise and choppiness related to insurance and deductible resets and a multitude of holiday shortened weeks. We've now attained well over 20,000 prescriptions launched to-date with plenty of headroom for continued growth, as Frank mentioned, and our confidence continues to grow every week that we're providing the best topical treatment solution to plaque psoriasis patients. Now, as it relates to a core element of driving the conversion from steroids, the ZORYVE profile continues to satisfy the needs of prescribers and patients with exceptional feedback thus far. In particular, prescribers have been favorably impressed by the speed of onset, the ability to treat the toughest plaques not only on elbows and knees, but even on the palms and soles and the world-class tolerability profile that is playing out even more strongly in the real world versus what we saw in our trials. Physicians and patients need to see that the new product is worthy enough to truly become a viable replacement to topical corticosteroids through repeated and robust trial. And we continue to be confident that ZORYVE can deliver on that promise, remembering that prior attempts to replace steroidal agents was disappointing for one reason or another, including lack of sufficient efficacy, tolerability concerns or both. Moving on to slide 15, our physician intent to prescribe continues to be very strong. This is data from our recent physician ATU fielded a few months into launch, reflecting prescriber intent and prior behavior, contrasted to expected behavior across patient severities and psoriasis. ZORYVE tended use is expected to increase two to threefold across patients severity types in the next six months, all coming at the expense of decreased utilization of the mid and high potency steroids that are associated with psoriasis treatment. This is exactly what we want to see and emblematic of the march towards realizing our full potential. The willingness and intent to move away from the topical standard of care is indicative as ZORYVE is solving real challenges in topical psoriasis treatment. Tolerability, efficacy, the ability to be used long term and the ability to be used everywhere are hallmarks. Moving to slide 16. This slide gives us a glimpse into what types of prior therapies are being switched from to ZORYVE and a view into the types of patients adopting therapy. ZORYVE is currently playing a broad role. And at the left, you can see that the majority or almost two-thirds of switches to ZORYVE are from a topical corticosteroid or steroid combination product, as expected, as well as an increasing amount from other branded therapies, as you can see in the chart, as well as replacing older inferior non-steroidal agents such as calcineurin inhibitors and vitamin D analogs. As with any switching behavior, the satisfaction with the clinical profile for reasons of efficacy, safety or tolerability remain the key driver of therapeutic switch and is becoming increasingly apparent from our position and patient feedback that this is driving this period-over-period. Now touching on the third condition that Frank mentioned regarding what's needed to satisfy a full transition away from topical corticosteroids -- excuse me corticosteroids. I'll now turn to access and reimbursement. On slide 17, we previously stated that one of the key concepts for one product to be as easy to write and obtain as a next steroid is really the minimization physician hassle including step edits and prior authorizations. And we're pleased to bring new progress along the lines of our stated goal of broad and high-quality access. Now, at the onset, we said that these things, including high-quality coverage, faster formulary adoption, preservation of long-term gross to net and optimizing -- optimization for our volume franchise value are important. Remember that this is the first of four launches for Roflumilast and that our decisions are being made with the lens of enabling strong access across that portfolio of launches, product presentations and patient types. We've now secured formulary coverage, not just a contract but coverage at our second or the second of the three large national PBMs effective March 1st, building on the coverage with ESI that we announced at the end of 2022 and at a preferred Tier 2 coverage throughout with no preauthorization and a single-step through a topical corticosteroids same way, which represents the both standard and quality of coverage. Moving to slide 18 taking a deeper dive into the current non-steroidal topical product coverage and at the time of this call, based on our sources, this chart depicts the high-quality differentiated access that compares favorably on both time to coverage relative to launch date and quality in terms of step edit and prior authorizations versus recently other -- recently launched products. Importantly, this for us represents two of the three major national PBMs within roughly six months post-launch, a first-in-category pace and importantly, with no prior authorization, the key tenet of our access strategy. This brings us another step closer toward making ZORYVE easy to write and obtain at the next topical corticosteroids product which is key to fitting in the everyday treatment algorithm of dermatologists. In conclusion, on slide 20, I spoke from our Investor Day last year are the three core pillars to commercial success, anchored by the unparalleled product profile as the foundation. In terms of driving prescriber awareness and use, we're on the path with over 4,000 unique writers since launch and an aided awareness well over 90% for ZORYVE as per our survey field in November. In terms of patient engagement and driving patient positive experience, we already spoke to the testimonials daily on the overwhelmingly positive experience at ZORYVE. But in addition, we've been continuing to think about how to appropriately accelerate patient engagement in terms of awareness, consideration and request. Especially now as access is coming more fully online, and we want to drive into that. Now we currently have a very active digital social media and DTC campaign in place, but we are rigorously evaluating whether and when, a highly focused connected TV campaign could make sense for ZORYVE. And like any other business, repeat business is the greatest sign of customer satisfaction and our refills continue to escalate, which is a validation of that positive experience. Lastly, broad high-quality access is coming into focus as discussed. With coverage secured at two of the three major PBMs in just six months post-product availability, remember that the benchmarks suggest 12 to 18 months to secure broad commercial coverage typically. Importantly, the quality of one-step, no prior authorization formulary coverage of our most recent announcement is highly aligned with our goals of obtaining as much prior authorization free access to speed the flow of conversion of legacy products to ZORYVE and making it very easy to fit into the flow of prescribers today. I'll hand it over now to Patrick for an R&D update.

Thanks, Ken. Starting on slide 21, within the psoriasis community, excitement continues to grow for ZORYVE I want to start with some compelling data that we presented at the Winter Clinical Meeting in January, which was very well received by physicians and KOLs. These are data from our 52-week open-label psoriasis study showing durable efficacy with patients maintaining clear or almost clear that's an IGA of 0 or 1 for a median duration of about 10 months. Also worth noting is that 57% of patients achieved an IGA 0 or 1 at any point in this two-week trial. I'm really excited about these data. They've been very easy to interpret for docs and are particularly important to build momentum as patients are coming back to physicians' offices with positive experience that gives them a clear picture of what to expect as they continue with their treatment. On slide 22 now, physician feedback on AD, the data have been very positive. What continues to jump out is the speed of onset in our trials across both psoriasis and Atopic Dermatitis, which gives an early indication that the drug is working in the disease and, of course, the ever important safety and tolerability profile, which has been consistent across all of our programs. Recall triamcinolone, a mid-potency topical steroid is a standard of care in AD. And then INTEGUMENT-1 and 2, ZORYVE demonstrated comparable efficacy the safety concerns from considerable efficacy without the safety concerns through chronic use of topical steroids. Taking a closer look at the EASI-75 data from INTEGUMENT-1 and INTEGUMENT-2 2 on slide 22, we showed statistical significance at week one with clear separation already from vehicle. Then at week two, about 30% of patients achieved a 75% clearance already. And this continued to increase to over 40% at week four, which was the end of treatment. Keep in mind, steroids work quickly. So these data are exactly what physicians want to see. This gets back to the point about driving physician interest and uptake once this product is approved in Atopic Dermatitis. Turning to slide 23, it's just a critical element for patients. It's the most early -- most important early indicator for AD patients for them to know whether or not the drug is working. And here again, we showed statistical significance in separation already at week one, building nicely to nearly a-third of patients by week four. Looking forward, we'll showcase some exciting daily itch data at the AAD in a few weeks, which will really nicely characterize the early onset of action of this drug within the Atopic Dermatitis. On slide 24, I want to touch briefly update, because safety and tolerability are so critical for this disease, which has a substantial proportion of pediatric patients. This table shows rates for the adverse events in high of our two Phase III trials to have a 2% or greater incidence in any arm. Not looking to go into any detail here. These are just data that we have shown previously. Just key takeaway is to highlight the favorable safety profile, which is consistent with our other programs, including psoriasis and given that AD is a disease with a skin barrier defect as a key part of the pathophysiology. These patients tend to be sensitive to local adverse events with topicals and many agents irritate the skin in individuals with atopic dermatitis. Here, again, I think we're reaping some benefits from our formulation, which avoids contact irritants like propylene glycol. Finally, turning to slide 25. I have some of our accomplishments and upcoming milestones. You can see significant sustained long-term growth potential with additional approvals label expansions, both within the US and outside as well. I'm very excited to highlight our Seb Derm NDA submission earlier this month, which puts us with a potential approval in late 2023 for the SebDerm foam formulation. Here physician excitement is palpable for the foam formulation. We're hearing a lot about it when we're talking to Derm's out in the field, but largely, this is being underappreciated, we think, by Wall Street. Coming back around to our most near-term milestones, we have the action date with Health Canada at the end of April for psoriasis. Then next, we have a lot going on in atopic dermatitis in the second half of 2023, the submission of our sNDA for ages six and above in AD as well as top line data readout for the INTEGUMENT-PED study. Again, very excited about Roflumilast cream clinical profile NAD, which I shared with you today, especially the rapid onset of action, and we see this as a significant opportunity for ZORYVE in this large and growing market. Q4 is the anticipated approval date for the sNDA in psoriasis in children down to the age of two, which Frank mentioned earlier, and finally, we plan a submission for foam for the scalp psoriasis in the first quarter of 2024 after an anticipated SebDerm approval. On that note, I'll turn it over to Scott.

Thanks, Patrick. Turning to Page 27 of the slide deck. Net product revenues were $3 million for our first full quarter of launch driven by ZORYVE steady growth in unit demand. Our gross to net discount rate improved modestly in the quarter and continues to be meaningfully better than other recent branded topical launches at similar time points. Looking ahead to the first quarter of 2023, we are very pleased with the continued steady week-over-week growth that we can all see in the weekly script data and today's new payer formulary coverage announcement bodes well for further volume growth. We do expect first quarter revenues to be impacted by the typical higher pro-paid [ph] program cost that most commercial products experienced in the first quarter of every year, leading to temporary erosion mid-Q1 gross net discount rate. Given this dynamic, first quarter net sales may not be meaningfully higher than the fourth quarter as our continued demand growth is offset by the higher gross-to-net. We believe that this is just early launched noise. As I just mentioned, we have been growing precisely and beyond Q1, we expect the additional formulary coverage we announced today, combined with the earlier Express Scripts announcement to drive continued volume growth as well as improved gross-to-nets. We continue to believe that we will achieve a steady-state gross-to-net around 50% and potentially sooner than is typical. This will translate into more meaningful revenue realization through the balance of the year and into future years. Turning to the fourth quarter P&L on Slide 28. Research and development expenses were $34 million in the quarter. The decrease year-over-year is primarily due to lower clinical development costs for our topical Roflumilast programs. We expect R&D to tick up slightly in Q1 versus Q4 and then be relatively stable for the balance of 2023. SG&A expenses were $37 million for the quarter, increasing largely due to higher commercialization expenses for the ZORYVE launch. We expect some sequential growth in SG&A, as we continue to invest in the psoriasis launch and prepare for our potential launches in seborrheic dermatitis and atopic dermatitis. Net loss was $72 million for the quarter, flat to Q4 2021. Turning to our final slide on Page 29. We provide some key balance sheet and cash flow items. As a result of the financing as Frank mentioned, our balance sheet remains strong with cash of approximately $410 million as of December 31. Our capital allocation priorities remain very targeted in 2023 prioritizing, of course, the ZORYVE launch in plaque psoriasis as well as preparations for the upcoming potential launches in seborrheic dermatitis and atopic dermatitis; and finally, the continued advancement of our pipeline, specifically our topical JAK program in alopecia areata and our CD200R program in atopic dermatitis. This concludes the financial update. I'll now turn the call back to Frank to wrap up our prepared remarks.

Okay. So I wanted to thank everyone for joining. I know we covered a lot of material in very short order. So at this point, we're going to transition to a Q&A. And so I'll turn it over to Eric.

Olivia, we can open the line, please.

Certainly. [Operator Instructions] And our first question coming from the line of Vikram Purohit from Morgan Stanley. Your line is open.

Hi, good afternoon. Thanks for taking our question. So two from our side. So you provided some color about the profile of patients being prescribed ZORYVE, but I was wondering if you could speak about how they're receiving the treatment from what you're seeing, has it mostly been monotherapy so far, or are they getting it in combination with other options? And then secondly, pivoting to atopic dermatitis, assuming approval in that indication for roflumilast cream, how do you think gross to net could trend in that indication? And how would you compare and contrast the trend line for gross to net there versus what you're seeing with psoriasis? Thanks.

Hey Vikram, this is Ken. Thanks for the question. So as it relates to specifically patient types or mono and combination therapy. So from the source of business lines, you can see that primarily, it seems as though the predecessor therapy is a single therapy. However, in the field, we also see lots of instances where physicians are doing what they normally do with topicals, which is adding them on to the back of a biologic. And while not specifically indicated for that use case, we're obviously not contraindicated for that either. So we're seeing a mix of that. Now remember, biologics and Ducentis is only a fraction of the overall market. So anywhere between about 20%, 25% at most our patients are on systemic and that would represent the maximum combination use, but monotherapy is largely the situation in which people come from topical corticosteroid and/or alternative onto our products. So I'd say, we don't have the data to put in front of you quite yet in terms of the exact monotherapy combination or combination percentages, but monotherapy would be -- based on my knowledge, the most common use case.

Are you talking about AD gross to net?

No, we expect AD gross to net trends to come on with coverage.

Thank you. Sorry, I thought that was a question for Scott. So sorry, the question regarding AD, gross to net. So one of the things as we're negotiating and you'll see is that we do expect with some payers, obviously, synergistic relationships between current coverage for psoriasis and future indication. So while not consistent across every payer within each agreement, there are stipulations in which some cases, the assets would transpose on to the next indication, but other instances would require new negotiations. Now that being said, one of the benefits of those coming downstream of psoriasis and having done the legwork going into the psoriasis launch is that the familiarity and so the clinical performance of the products are already understood. And so a lot of that time being spent socializing that with peers, demonstrating the value proposition, et cetera, we'll have already been accomplished, and then we'll be talking about the new indication. So I expect there should be some truncating of that overall lead time as we move from indication to indication.

Understood. Thanks a lot.

Yeah.

Thank you. One moment for our next question. And our next question is coming from the line of Seamus Fernandez from Guggenheim. Your line is open.

Hello. Great. Thanks for taking the question. Just wanted to get a better sense of, obviously, congratulations on bringing forward an additional contract. It sounds like gross to net from the trajectory over the balance of this year is going to improve substantially quarter-to-quarter. Just wondering if there will also potentially from your perspective, be a bit of a release and prescribing capacity as physicians really write scripts for ZORYVE as the confidence improves, that with each script written, they've got kind of a two-third chance of having a fully reimbursed prescription. Just wanted to get a general sense of that. And then incremental to that, just would love to know how you're thinking about the trajectory of the business, particularly with regard to seborrheic dermatitis and how the new foam formulation is likely to flat into those coverage opportunities? Thanks. A – Scott Burrows: Sure, Seamus. I think both of those are for me, right? So I'll start with the sort of confidence and kind of the two-third or 60% shot at which I like that thinking. So we would expect, as coverage improves to obviously be capitalizing on this through targeted messaging to the offices in which those patients -- where those patients reside. We do know kind of geographically where these plans and PBMs impact. And so we're able to target those offices and make sure that they're aware of these updates. I think in the big picture, you're absolutely right, which is as you're writing -- the more you write, the more you get kind of covered -- the confidence sort of builds upon itself, and that's the intent, when we talked about the idea of sort of the faster and better coverage leading to ultimate conversion is -- one has to have that sort of underlying confidence with respect to if I'm going to do this, is it worth my time and is the patient going to end up on the therapy. And so that is the sentiment, and we would expect that to improve I think I would say two-third is probably more of a tipping point than one-third with respect to having just one on board previously. And I would expect that should help in terms of really changing the habits that we see. And ultimately, when we do achieve our access goals of bringing on kind of all three major payers, the messaging will be just that, which is you’ll have confidence with this doctor in terms of writing and you're very likely to get it if your patient is commercially insured. Not to mention the fact that for our uninsured patients, we do have a program as well. So we're trying to really take that pressure off the decision-making in terms of thinking about that as a -- almost a criteria for writing, it really should be kind of second nature just like it is a topical curve. So that would be the desired state with respect to what we're seeing. So I do believe that the confidence will start building and thus the pace A – Frank Watanabe: Now I think -- this is Frank. Just quickly, I think in addition to the two-third coverage, the other key piece to that is the lack of a prior authorization, right? Because if doctors are putting in prescriptions and they're getting kicked back from the pharmacies for additional paperwork. that's not as bad as a denial, but it certainly adds to the friction and having obtained coverage now for two of the three big PBMs without a prior authorization, I think, will be another important facet of prescriber confidence. A – Scott Burrows: So then pivoting back to your question regarding SebDerm Seamus. So I think a couple of things in play here. So recognizing that the population of patients sort of skews older, it invokes a slightly different insurance mix, right? So we're thinking about a little bit more government-pay patients, a little bit less commercial pay patients. So first and foremost, we need to be thinking about that and sort of our aspirations for government pay insurance types. I think the second thing is that, as I mentioned to Vikram, we should assume that there will be some carryover or transposition of some of our coverage, so to speak, into sub-derm. However, just as we think about government pay and securing things like Medicare coverage, in general, the rebate expectations are higher than that of commercial pay. So, I'm not 100% sure quite yet how that will play out. It's obviously going to be a mix in terms of overall gross to net. But the price to pay, so to speak, for the government payers is typically higher than that of a commercial pay. However, in sub-derm, overall, from a net perspective -- I'm sorry, from a total competition standpoint, it's still majority commercial, but the percentage of government pay is about, let's call it, 45% versus what we see in something like a psoriasis, which is about a third. Okay, Olivia, can we go to the next one?

Our next question coming from the line of Ken Cacciatore with Cowen. Your line is open.

Hey team. Congratulations on all the progress. I know just Frank and Ken, stepping back, there's many ways to launch a drug and I know there's multiple ways to be successful in it. But can you talk about some of the differences from your perspective on how you're approaching this? And you're giving very detailed, but maybe you could juxtapose that against your competitor because unfortunately, on Wall Street, especially when we're nearly simultaneously launching products, you get compared in terms of the Rx and the trajectory of your launch and their launch. But maybe you could bring out some of the subtle nuances to your approach and why we seem to be sticking with it and ultimately, why we're going to be successful? And I'll say one thing before you answer. We have done a lot of doc checks, and I just need to say exactly mirroring what you're hearing. They definitely giving us great feedback on the product. But with that, I'll let you answer that question. Thank you.

Sure Ken. I'll take a stab at that. So, thanks for teeing it up. Obviously, to the naked eye, I think the trajectories look very different. And I think we've said in the past that we're comfortable with the sort of a steady progression that's focused on disciplined financials. We aren't sub-juicing, if you will, any of the of the prescriptions by sort of putting out temporary offers or buy-downs, which then kind of -- I think I read recently, there was a comment about when the honeymoon period ends, right? So, when companies start pulling back their introductory offers and some of the reality set in. So, we've typically -- we've generally refrained from kind of going out with offers that are too good to believe, or too good to be true. Very typically, those tend to be sustainable and then start morphing. And then actually, it only works in one direction, which is to disappoint your customers and your patients. So, we want to keep that sustained sort of approach in a disciplined way. That's why you're seeing the trajectory that you're seeing. And it's not, again, like boosted by kind of artificial instruments or anything that was make that look the way it looks. So, those are fundamental differences in terms of -- and the second thing is that with this sort of disciplined approach and of course, our pricing coming into play, you would expect then the type of -- the velocity at which we're getting our coverage to ultimately be the throttle or the rate limiter on kind of how we take off in the market. So, I get the question a lot, hey, are you going to see an inflection all of a sudden based on getting coverage? The short answer is no, because with coverage, it takes time, obviously, for those patients to work their way back into the offices. They're not all sort of waiting to rush in the second we get coverage. So, I would anticipate the trajectory to kind of continue to grow and build steadily and importantly, the type of access that we have, which is hopefully as easy as possible to position such that it's, again, as easy to or sort of second nature to write our product. That's what I believe we'll continue our sustained growth. So those are some of the sort of key differences, I would say, with respect to kind of how we're doing things. And we intend to sort of keep those offers that we have in the market. So steady, sustainable, predictable, I think these are very important for the credibility of both the company, as well as the physician, who ends up kind of articulating this to a patient, because coming back three weeks later and saying, well, I thought it was this and it's not that. That's something that I think is it's a great deal of frustration and the offices and at the patient level, that's not what we're doing.

Yes. Ken, good to hear from. The only thing I would add, I think, is beyond the access piece that Ken talked about. We talked about product profile. And I think it's critical that early clinical experience with the product be consistent with what the doctor and the patient have been told, right? That the efficacy needs to be consistent with the data and the tolerability and safety needs to be consistent with the data. And I would say that what we have heard and I think what you and some of the analysts have also heard from your doctor tech is that ZORYVE is matching up to those expectations in terms of both efficacy and tolerability. And we think that, that's really building a solid foundation. You know from your many years in the field, when doctors are disappointed or patients are disappointed with their experience with a product that can very quickly turn the sentiment on a product, and we've seen any number of examples of that in the past. So, we think it's critical that the product is delivering on the promise, and that's what we're hearing from our customers.

Great. Thank you, so much.

Thank you. And our next question is coming from the line of Greg Fraser with Truist. Your line is open.

God afternoon, folks. Thanks for taking the questions and congrats on progress. The conversion analogs that you discussed are notable not just for the uptake of the new differentiated class, but also for overall market growth, see the potential for significant volume growth for the topical psoriasis market is or even other nonsteroidals and traction, or do you think the dynamics for the psoriasis market will be more about conversion from steroids and not necessarily significant growth in possible Rxs?

Certainly, I think there's an opportunity for growth in the market from a couple of aspects. The first one is, if you look at the epidemiology, there are clearly a lot of patients who are not currently on prescription treatment. And that may be a variety of reasons, lack of insurance coverage, but we know that one of those factors is frustration with existing treatment choices and so having a product like ZORYVE out there that is efficacious is safe and well tolerated and is readily available, may bring some of those patients back off of their couches and back into the dermatologist office. I think the other thing is that topical steroids are very effective in treating plaque psoriasis, but they can't really be used chronically safely. And so there's a natural limit on consumption of topical steroids and the non-steroid alternatives historically have not been very effective, nor have they been very well tolerated. So having a drug that's as efficacious and is safe and more tolerated as there, there may be some opportunity for volume growth even amongst existing patients based on that as well. I think -- sorry, I think the other point I would make, too, is that outside of psoriasis, I think as we add these additional indications as well, those are further opportunities to grow the overall opportunity for nonsteroidals. Ken, do you have any additional thoughts or Patrick

Pat.

No.

Olivia, can we move to the next question?

Thanks, Greg.

Our next question coming from the line of Louise Chen with Cantor. Your line is open.

Hi. Thank you for taking my questions here. So first question I have for you is, how do you think the uptake for atopic dermatitis, if approved, will be compared to what you see for psoriasis and why? And then secondly, what do you think the read-through is from the adult psoriasis data -- sorry, the adult AD data to the pediatric AD data? How should we think about that? And then last question is just thinking about the potential competitive advantages of ARQ-234 and where that might enter the clinic? Thank you.

So I'm going to take the first one, and then I'll ask Patrick to talk about the 80 read-through and the 234 question. So I think that with regard to uptake, I think there certainly is a potential that atopic dermatitis could have a faster uptake for a couple of reasons. The first one is, as Ken mentioned, there could be some acceleration in access decisions for atopic dermatitis just based on psoriasis. The second one is, we have the advantage that doctors are going to have a great deal of familiarity with topical roflumilast when we get the approval in atopic dermatitis. And I think that's particularly important because we know that when we launched ZORYVE, there was a certain degree of skepticism about topical PDE4s based on prior experience with the other topical PDE4 inhibitor, and it's taken doctors a little while to dispel some of those anxieties. None of that will be an obstacle to the adoption in atopic dermatitis. So I think when you pull all of those together, we certainly could see a faster initial uptake in atopic dermatitis. Ken, any other thoughts from your side?

And then so Patrick, can you maybe talk about the read-through from INTEGUMENT-1 and 2 to INTEGUMENT-PED and then ARQ-234 and some of its advantages in the clinic? Clinical advantages.

So with regard to – yes, all right. With regard to the read-through from INTEGUMENT-1, INTEGUMENT-2 to the INTEGUMENT-PED trial, keep in mind that 1 and 2 enrolled patients ages six and above and the INTEGUMENT-PED trial at ages two to five. I think that reading out two successful Phase III studies in atopic dermatitis, where we're not really seeing within our data or looking across other data in atopic dermatitis, a really significant difference in how patients are responding based on their age and especially considering the fact that INTEGUMENT-1 and 2 included a lot of pediatric patients from the ages of six, all the way up and including adolescents up to the age of 17. So we're seeing a very strong read-through from INTEGUMENT-1 and 2 over to the pediatric trial that we're planning to readout in the second half of this year. With regard to 234, we haven't released any time lines with regard to that program right now. We'll probably be in a place later this year to say a little bit more about them. But we do see based off of just the mechanism of action of CD200R, as well as some of the clinical data that's out there, not with ours with another CD200R agonist. What we're seeing is that we're seeing the potential ability of this pathway to have an extended effect on the immune system, not specifically by suppressing the immune system but by adjusting the response so that it's targeting specifically those pathways that may have been activated. And in the case of diseases like atopic dermatitis, these are pathways that would have been activated, not in response to a signal that needs to be managed, but more kind of pathologically activated is the potential to be able to have a more long-term response than what you might be seeing with IL-4 and IL-13, which needs to be dosed quite frequently as well as an ability maybe to manage this disease without creating any kind of immune suppression. So these are some of the aspects of CD200R that made it very interesting to us, and we're looking forward to giving you more information about that program as we progress it internally.

Thank you.

Thank you. [Operator Instructions] And our next question coming from the line of Rohit Bhasin with Needham & Company. Your line is open.

Hi. This is Rohit on for Serge. Thanks for taking our questions. Can you talk about any particular trends you're seeing in terms of new Rxs versus refills? And then in terms of the OpEx, I know you mentioned you expect SG&A to increase, but can you provide any additional color there? Thanks.

Sure, Rohit. So I think you probably are seeing the same trends as we are. NRx remains strong. And one of the things that's tricky about TRx is because this is a cry condition in the topical space though, the therapy seems to be used acutely, and that's why we see kind of overall expectations for adherence to be in the neighborhood of 3 to 4, 2. So it was a little bit tricky to see kind of patients are continuously using because they're coming in at all different levels of severity and all different levels of body surface area. I will say, though, we are seeing positive trends with respect to some patients coming back for 2, 3 and 4 already. So certainly a good sign with respect to overall patient satisfaction and adherence. But the ratios, if you will, that you can kind of see them in the weeklies are pretty representative of what's happening. What I'm enthused about is that our NRx trends appear to be quite strong. And again, the TRx is -- the refills that are sporadic because it's not a 1:1, a patient might pick up a refill now for a prescription they got in August, for example. So it's a little bit trickier there. But the NRx trends for us, I think, look good and the more awareness and confidence that the community builds additionally with the additional coverage, I would expect that to continue to grow.

Yes. And then a question on SG&A trajectory. I would say that we're still obviously quite early in the launch of psoriasis. You can expect that to grow a little bit as we bring on new sales and marketing tactics over time. And then importantly, we just had our NDA accepted a couple of weeks ago for seborrheic dermatitis, and so we want to make sure we're well prepared for that [indiscernible] line. So we'll be investing ahead of that launch that could commenced late this year or early next year. So we'll start to invest in the launch there.

Thank you.

Thank you. One moment please for our next question. Our next question coming from the line of Uy Ear with Mizuho Group. Your line is open.

Hi, guys. Thanks for taking my question. I was wondering, I think you guys indicated that there's some 4,000 physicians that have already win prescription. Just curious to know how many physicians have your sales reps reach out to? And Yes so that's the -- and I guess, why -- what would it take for the rest of these physicians to write a prescription? And the second question I have is, could you help characterize the opportunity for plaque psoriasis in pediatrics, I guess? And would you need -- would you launch this on your own, or do you think you need a partner? Thanks.

Sure. So let's first start with the sort of 4,000, vis-à-vis the targeted. So at this point, we think of the target universe in total between 12,000 and 13,000 physicians are targeted. We've reached or spoken to about 10,000 of those thus far and so, gaining momentum in both awareness as well as trial. As for the specifics of why they would or wouldn't. I can't pinpoint exactly those reasons. Obviously, sometimes we need to reach out to them several times in a row or they need to get some additional confidence for one direction or another, whether clinically, from a colleague, by patient request or ultimately kind of seeing or reading about the product a little bit more. But it takes several cycles. In other words, one conversation is typically not enough to get a prescription secured. We obviously are driving as hard as we can. And we continue to look to evaluate other instruments to improve our reach and more importantly, our frequency of those physicians. So that's all I can really say. I don't really know sort of the absolute by position reasons. But those that have adopted, clearly, they've adopted robustly. And we're happy to see that. On the second question, you mentioned the -- I think the pediatric psoriasis opportunity, is that what you're asking?

Yeah.

So that opportunity remains to be, it's pretty small actually in terms of absolute prevalence, sort of single-digit percentage prevalence for that group. And so first and foremost, we wouldn't be looking to expand into pediatrics as a result of this particular opportunity. What this confers for us is really an additional halo or additional sort of confident signal in terms of the safety profile of the product. As with, for example, other like biologics and such typically, you see that with psoriasis well they'll go all the way down to two, recognizing that really, that's more of a marker and sign, a signal of safety than it is a sort of absolute market opportunity. Where we would do that, obviously, for atopic dermatitis where the sort of the prevalence of that is significantly higher in pediatrics and we've spoken before about, how we would do that, which is largely through a partnership mechanism with a company that would have a footprint in pediatrics already. I don't know that we would expand our team that much, because it's a very large footprint to get into primary care.

I might just add with regard to the pediatric psoriasis topic. It is a small population, but there are very, very few options for those patientsm, approved options for young children. Most products aren't even approved on the 12, which is what we're currently proved down to. And one of the things that we've talked about in the past with the investment community was that our decision to study to read down to the age of two was actually the bad for the FDA. I think which was probably a reflection of their confidence in the safety of PDE4 as a target, they really encouraged us to study this down to the age of two. And we agreed because we felt that it was an important question to answer and important data for doctors to have, which is what led us to do it even though we knew it would not be a large source of business for us.

Okay. Thank you.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Frank Watanabe for any closing remarks.

Okay. So let me first off, thank everyone on the Arcutis team. 2022 as I think you all have seen was an exceptional year. That didn't happen by chance there was a huge amount of work done by what I think is just a phenomenal team of individuals, and I'm delighted to be working with each and every one of them. And secondly, I want to thank our investors for continuing to support us. And then lastly, I want to thank all of you for joining in on the call today. So with that, we look forward to talking to you all in another three months.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.