Arcutis Biotherapeutics, Inc. (ARQT) Q3 2024 Earnings Report, Transcript and Summary

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

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

Thank you, Latha, and thank you to everyone for joining us today. With that, let me turn to Slide 5 of the deck. I'm pleased to report that we maintained our robust growth trajectory in the third quarter, and I'm constantly impressed by the entire Arcutis team and its exceptional execution. Our expanding ZORYVE portfolio now encompasses psoriasis, seborrheic dermatitis, and atopic dermatitis, providing physicians and their patients multiple forms of ZORYVE cream and ZORYVE foam to address their needs. ZORYVE is the first and only topical anti-inflammatory agent with indications for all three of these very highly prevalent conditions and physicians are becoming increasingly familiar with our product portfolio. ZORYVE portfolio sales grew 452% year-over-year and 45% quarter-over-quarter, reaching $44.8 million, which is remarkably strong, particularly following the impressive growth we've had in previous quarters. Furthermore, our third quarter revenue run rate is an encouraging sign for an excellent finish to 2024 and provides us with strong momentum going into 2025, continuing to demonstrate the significant opportunity for ZORYVE. From a volume demand perspective, TRxs for the ZORYVE portfolio grew 25% quarter-over-quarter. New prescription growth was also impressive, increasing 23% quarter-over-quarter. Also on this call, you will hear Todd discuss the ongoing gross-to-net improvements progress we are attaining, and I'm delighted that we are now in the low 50% range, a meaningful improvement from the high 50s last quarter. Our atopic dermatitis launch has been steadily gaining since the late July launch, and we're excited about the long-term potential of this additional indication and its expected contribution to the overall brand. Looking forward to the remainder of the year and into 2025, we believe we are well positioned to maintain strong revenue growth. Historically, many topicals have struggled to grow revenues or to sustain that growth long-term, but we are confident that ZORYVE is different, and I'd like to share with you all the reasons for our confidence in the long-term growth potential of ZORYVE. On Slide 6, we have already achieved impressive revenue growth with the ZORYVE family of products, driving both prescription growth and significant gross-to-net improvements. But we are just beginning, and I would point to four significant factors that are going to allow us to sustain the growth of ZORYVE and to redefine what can be achieved with the topical product. We are building out the ZORYVE product label with the expected approval of scalp and body psoriasis in the middle of 2025 as well as expanded indications for pediatric patients in atopic dermatitis and psoriasis. These new and expanded indications will further physicians' ability to rely on ZORYVE as their go-to first-line topical agent. Having successfully penetrated commercial payers, we are now working to make ZORYVE accessible to government pay patients across both Medicare and Medicaid, opening access to as many as 3.3 million incremental patients in the dermatology offices, and Todd will update you on our progress thus far on this front. Securing access to the large government-insured population has been a priority for us from the start, and our progress here is clear validation of our pricing strategy. Our partners, Kowa, are now promoting ZORYVE to high potential primary care doctors and pediatricians, and the early feedback is very positive. The new and expanded indications and broader insurance coverage across commercial Medicare and Medicaid will amplify the impact of their promotional effort. We expect meaningful contribution from this co-promote beginning in 2025 and growing from there. Finally, there are approximately 16 million topical steroid prescriptions written by dermatologists for our approved indications each year, and we are just scratching the surface of penetrating this large segment. The first three elements I discussed will be foundational in shifting topical use away from steroids as we emphasize the safety of using ZORYVE for any duration and anywhere in the body, coupled with its strong efficacy. We are also increasingly hearing from the dermatology community their recognition of the need to reduce their reliance on steroids. So that will be another tailwind behind ZORYVE's growth. We are confident that we will drive this shift away from steroids over time. Turning to Slide 7 to spend just a few more minutes to help quantify the very large expansion in our target markets that I just mentioned. We keep highlighting the slide to provide a concrete sense of how significant this expansion is as well as how attainable it is. Up to this point, we have been primarily focused on the roughly 4.5 million commercially insured patients with our target indications treated in the dermatology office. And we are expanding our penetration of the psoriasis, seborrheic dermatitis and atopic dermatitis patient segments and continue to take share from other topical agents. As Todd will discuss in a bit more detail in just a minute, we are very proud that ZORYVE is now the number one branded topical anti-inflammatory agent for new prescriptions, and we anticipate taking the number one spot for total prescriptions very shortly. Our dramatic growth in market share in the branded topical space is a testament to physician preference for ZORYVE driven by our rapid robust and reliable efficacy, our strong safety and tolerability profile, the patient-friendly once-a-day formulation, and our broad and ever-increasing insurance coverage. And as we gain Medicare and Medicaid coverage, we will be able to expand ZORYVE usage to the more than 3 million dermatologists-treated psoriasis, atopic dermatitis, and seborrheic dermatitis patients with government insurance. In addition, our new co-promotional partner, Kowa, is allowing us to simultaneously expand into the more than 7 million commercially and government-insured patients treated for their psoriasis, seborrheic dermatitis or atopic dermatitis outside of the dermatology office. A very large percentage of all of these patient segments are currently treated with topical steroids and momentum is growing in the shift away from topical steroids, although this has really only just begun. ZORYVE is the perfect replacement for topical steroids, offering physicians and patients robust efficacy, the ability to be used anywhere, tolerability that allows chronic use unlike steroids, and broad insurance coverage. Todd will further expand on this in just a few minutes. This immense market size and the continued expansion of the market segments where we are competing are what make us so optimistic about the blockbuster potential of ZORYVE. I did want to take just a moment to also touch on an important governance announcement we made this morning. Our Board of Directors has appointed Keith Leonard as the Chair of our Board effective this Monday. I'm delighted to have Keith taking over the leadership of our Board. We've worked together closely for many years across several companies, and he has been on our Board for the past three years. He possesses an incredible level of Board and operational experience and commercial acumen, which will be invaluable to us as we continue to drive our growth of the ZORYVE franchise. So congratulations to Keith. I also want to sincerely thank Patrick Heron, our previous Chair, for everything he has done for Arcutis and for me personally. Patrick has been with us from the very beginning and has been our Chair since 2018, guiding us through our IPO, our commercial launch, and so many other significant milestones. Equally important, he has been and I'm sure he will continue to be a fantastic mentor and coach to me. And I couldn't be happier that Patrick has agreed to stay on the Board as one of our independent directors. With that, let me turn it over to Todd to provide some further commentary around ZORYVE cream and foam launches in psoriasis, seb derm and atopic dermatitis.

Thank you, Frank. We are extremely enthusiastic about the growth and expansion of our product portfolio, strong response from HCPs and patients with immense opportunities that lie ahead. This quarter, we achieved $44.8 million in net product revenue for ZORYVE for the third quarter of 2024, reflecting 45% growth over the second quarter, continuing the strong quarter-over-quarter growth trend that we have had throughout the year. We have now delivered more than 40% quarter-over-quarter growth in revenue every quarter since Q1 of 2023. This robust revenue growth was driven by both prescription growth across the portfolio of ZORYVE products and gross-to-net percentage improvements down to the low 50s. Prescription growth was driven by strong uptake of the foam formulation and progression of the launch of the 0.15% cream for atopic dermatitis and the ripple effect of growth into the 0.3% cream for psoriasis. We look forward to a strong finish to 2024, which is expected to set us up for a steady start in 2025. This will position us well going into the softness typically seen in the first quarter of the year, driven by patients enduring deductible resets, switches to new health insurance and consequently prescription refills pulled forward into December. So in Q1, this leads to both gross-to-net and volume dampening. Moving to Slide 10. The ZORYVE prescription volume has reached yet another all-time high at 11,000 scripts over a rolling four weeks. Quarter-over-quarter prescription growth was 25% over Q2 and 280% over last year. In this graph, inflections in growth for the launches of ZORYVE foam for seb derm and 0.15% cream for atopic dermatitis is clearly visible. Regarding our recent atopic dermatitis launch in the quarter, we are very pleased with the performance of this launch and continue to see strong momentum. As we have said before, we expected the AD launch to outperform the psoriasis launch and that is what we are seeing. Around three months into the launch, the new Rx weekly prescriptions are substantially higher than psoriasis every week since launch, and feedback from both providers and physicians has been very positive. On to Slide 11. I want to point out our gross-to-net evolution that is linked to the strong coverage position from all three of large PBMs, and progress with formulary access and downstream plans as well as our ongoing pursuit of coverage from government payers. We have consistently demonstrated our ability to drive covered prescriptions with roughly four out of five ZORYVE 0.3% cream prescriptions are being covered. For ZORYVE foam, we saw further improvements, reaching three out of four prescriptions covered in less than three quarters from launch. And for atopic dermatitis, only a few months into the launch, three out of five prescriptions are covered impressively rapid progress in a launch. In the chart on the right, the progressive improvements in our blended gross-to-net are visualized with substantial progress from last year when only the 0.3% cream was available with gross-to-net in the low 70s to high 60s. We achieved further improvement even as we launched seb derm progressing to low 60s and high 50s. And now blended gross-to-net across all three indications has reached the low 50s, a trend typical -- not typical with expansion of indications and contributing to the profitability of the overall franchise. Our gross-to-net is essentially at a steady state. While we expect some variability quarter-to-quarter, we expect that it will remain in the 50s. As mentioned earlier, we expect a seasonal regression in gross-to-net during the first quarter of 2025. At Arcutis, we are laser-focused on driving not only prescription demand, but paid prescriptions as we work towards building a profitable business. We are delighted with what we have already achieved in commercial insurance coverage and very excited about progressing our government insurance coverage as well. And I am delighted to report that since our last update, we have secured Medicaid coverage in California, Arizona, Michigan and Indiana, adding to our previously announced wins in Florida, Texas and New York. We have now secured Medicaid coverage in states that represent roughly four in 10 Americans. We expect to add additional states soon. And the quality of the Medicaid coverage is very strong. We are also making progress in our negotiations with Medicare Part B programs. These government pay wins are the ultimate validation of Arcutis' differentiated approach to pricing and will help fuel our growth in the future. Slide 12 highlights new prescription share of market in the branded topical space, a leading indicator for future brand growth. The ZORYVE family of products is now leading all the other branded topical agents on a rolling four week new Rx share. As Frank alluded, we are very close to seizing number one for total prescriptions as well in the near future. While this is exciting progress for the portfolio, the most significant growth opportunity is in transitioning patients away for topical steroids. On Slide 13, we show that the overwhelming majority of prescriptions are topical steroids across all three indications within the Arcutis target universe. Of the 22 million topical prescriptions written by dermatology clinicians in our three current indications in the last four quarters, roughly 16 million are topical steroids, while in contrast, just over 1 million prescriptions are for branded topical non-steroidals, highlighting the immense growth opportunity as clinicians transition away from steroids into newer topical agents. Driving this transition from topical steroids to the ZORYVE portfolio will be the cornerstone of our growth in the future. Moving to Slide 14. With the recent FDA approval in atopic dermatitis and availability of three different products, we are building a broad portfolio of ZORYVE solutions for clinicians in a multitude of approved indications that will sustain future brand growth. The benefits of the ZORYVE portfolio of products that will address three different very common dermatology diseases with the current standard of care as topical steroids is unprecedented and creates treatment simplicity for the prescriber and patient management. The common clinical attributes of ZORYVE across indications such as its robust reliable efficacy, rapid relief of itch, a once-a-day formulation that can be used anywhere on the body, and a simple and consistent prescription fulfillment pathway will drive physician preference for ZORYVE for both dermatologists and primary care prescribers alike. We are methodically building our franchise and well on our way to becoming the preferred topical brand in dermatology. Now let me turn it over to Patrick.

Thank you, Todd. I'm on Slide 16. I'm extremely proud of the team's performance in delivering on the promise of topical roflumilast to the dermatology community in the clinic and continuing to hit all of our timelines with regard to regulatory milestones. And we were just at the Fall Clinical Dermatology Conference and received a lot of great feedback about ZORYVE cream for atopic dermatitis. HCP excitement is growing as providers build their own clinical experience with ZORYVE and AD, and confirm that the product profile is a good fit for what they and their atopic dermatitis patients are looking for. So keeping with AD, we're looking forward to the submission of our sNDA for the treatment of mild to moderate AD in two to five year olds, which is planned for quarter one of 2025. And we continue to generate additional data that should ultimately support expanding the psoriasis indication down to the age of two. For foam, we have a PDUFA date approaching in May for scalp and body psoriasis. If approved, this will represent our fourth indication for ZORYVE. And in a moment, I want to share some of our patient responses and data, so you can see why we're so excited to bring this indication to patients. Finally, we're progressing our pipeline. Coming up in 2025, we expect to file the IND for ARQ-234, our biologic CD200 Receptor agonist for atopic dermatitis. And we have a Phase 1b readout in the first half of 2025 for ARQ-255, which is our topical JAK in alopecia areata. Now coming back to ZORYVE foam on Slide 17 and our next new therapeutic focus, which is leveraging the properties of ZORYVE foam to help patients with scalp and body psoriasis. Almost half the plaque psoriasis patients suffer from scalp involvement, but this number doesn't capture the impact of scalp disease on quality of life and the challenges of treating it with products that are not fit for purpose. To provide more insight into how scalp psoriasis impacts patients, I'm going to briefly review some of the itch data from ARRECTOR, our pivotal Phase 3 trial of ZORYVE foam in scalp and body plaque psoriasis. We enrolled patients with at least moderate severity of the scalp and mild, moderate or severe disease of the body. 452 patients were randomized 2:1 to receive ZORYVE or vehicle foam over an eight week dosing period. And as I mentioned, we measured two co-primary endpoints of scalp Investigator Global Assessment, or S-IGA, success and body Investigator Global Assessment, or B-IGA, success at week eight. In addition, we assess itch using two 10-point numeric rating scales, the SI-NRS or Scalp Itch Numeric Rating Scale and the Worst Itch or WI-NRS, which is a traditional assessment of itch that covers the entire body. Remember, itch is a symptom that primarily drives the impact on quality of life and is identified by patients as the number one disease characteristic that determines the severity of their psoriasis. So on the left side of this -- on the left side of this slide, we have scalp itch data from week eight, showing that over 50% of patients achieved an SI-NRS score of 0 or 1. And similar results can be seen for WI-NRS on the left where 55% of patients achieved a 0 or 1 compared to just about 20% of vehicle-treated patients. Now this type of NRS 0 or 1 analysis is recommended by itch experts because it doesn't just capture a clinical improvement in itch, but goes a step further into a range where itch is a symptom is completely controlled and the burden of the symptom is eliminated. On top of this impressive week eight data, I'd also mention that ZORYVE showed statistically significant improvement in itch within 24 hours of the first application, a very important benefit for patients suffering from the unrelenting itch of scalp psoriasis. Not shown here, but the incidence of adverse events was low and generally similar between active treatment and vehicle across both our Phase 3 and Phase 2b studies. Overall, the most common adverse events included headache, diarrhea, nausea and nasopharyngitis. Moving on to Slide 18. I want to share photos from two patients and their progress over the eight weeks of our Phase 3 ARRECTOR trial. Both patients had severe disease coming into the study with scalp IGA of 4 on the 5-point IGA scale, which goes from 0 to 4. You can appreciate the erythematous or red plaques in their scalp with the characteristic thick white scale that we commonly see in scalp psoriasis. In these patients, it's primarily along the hair line where it's very visible, another common finding. In both patients, you can see rapid improvement in the scalp plaques after two weeks, accompanied by a reduction in itch by 50% or more in both patients. By week eight, both were considered a treatment success, having achieved an IGA of 1, which means almost clear. Importantly, you can also see that based on their SI-NRS, these two patients came into the study with a scalp itch of eight and nine out of 10 respectively. In addition to the clinical improvement, these patients also experienced an itch score of zero by week eight. That means complete resolution of their itch. One of the major challenges for managing psoriasis patients with scalp disease is the complexity of traditional treatment regimens. Often they end up with several prescriptions for their scalp and at least one or more for the body. One of the consistent themes about ZORYVE profile is that it simplifies treatment for the patient and ZORYVE foam for psoriasis is a perfect example of that. In fact, we designed the pivotal trials to highlight this benefit through the co-primary endpoints for scalp and body IGA that I mentioned. And ZORYVE foam can be used once a day on any area of the body where psoriasis occurs, including hair-bearing areas such as the scalp where creams, lotions or ointments are suboptimal, making the foam an effective treatment for scalp and body psoriasis. And with that, I'll pass it over to David.

Thanks, Patrick. I'm on Slide 20, showing financial results, both year-over-year and quarter-over-quarter. As you've heard, we generated net product revenues in the quarter of approximately $45 million, which is up 452% from Q3 of 2023 and 45% from Q2 of this year. This persistent strong growth reflects our continued success in gaining share of the very large addressable market for all three of our approved indications, and we certainly believe this growth is still in its infancy. For the third quarter, our R&D expenses were $19.5 million, which is down 26% from $26.2 million in the third quarter of 2023 due to decreases in the development costs of topical roflumilast programs and relatively flat compared to the second quarter of this year. Please keep in mind that a large portion of the expenses included in the R&D line item is comprised of medical affairs activities supporting ZORYVE commercialization and manufacturing costs for pipeline candidates. SG&A expenses were $58.8 million for the third quarter of 2024 versus $47.6 million in the same period last year as we invested in both our current and future launches, including expansion of our field force in late Q2. That total was more or less flat to last quarter, with G&A coming down by approximately $2 million as we found expense savings, while commercial costs increased by a little under $3 million, which is to be expected as we experienced robust sales growth. We still believe that we are investing appropriately in the tremendous growth potential of ZORYVE portfolio while constantly looking for ways to achieve savings and efficiencies. For the fourth quarter, excluding the commission to Kowa, we expect total expenses to remain roughly in line with Q3. The Kowa commission will be included on the SG&A line and to the extent that our partners are able to drive sales growth in primary care and pediatrics, this will lead to a commensurate increase in SG&A. I'd like to remind everyone that we only pay commissions to Kowa when they generate scripts and revenues. So those revenues are immediately accretive given there are no meaningful fixed costs for Arcutis associated with this partnership. On Slide 21, you can see we had cash and marketable securities of $331 million on our balance sheet as of September 30, which translate to a cash burn from operations in the quarter of $35 million. Our cash burn for the quarter was meaningfully lower than Q2, dropping by more than 23% quarter-over-quarter, and we would expect our quarterly cash burn to continue trending downward as our revenues grow. We told you last quarter that we had renegotiated our debt agreement to improve the terms, including adding the ability to repay up to half of the $200 million beginning in the fourth quarter of this year. While not reflected in the third quarter balance sheet, we did subsequently repay $100 million of the debt facility, which will significantly lower our interest expense. I would remind you that we have the option to redraw that $100 million in whole or in part at our discretion through the middle of 2026, giving us great flexibility to manage our available cash resources. We believe our current capital, together with available debt, our growing product revenues and improved economies of scale will enable us to reach our breakeven point in 2026 and operate the business for the foreseeable future while appropriately investing in our commercial launches and pipeline. We, therefore, anticipate no need to return to the equity market to support our existing businesses, as we've said before. With that, I'll hand back to Frank for some closing comments, and then we'll open for Q&A.

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

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

Vikram?

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

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

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

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

Got it. Thank you.

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

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

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

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

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

Great. Thank you.

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

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

Yes. Todd?

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

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

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

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

Sure. Patrick?

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

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

Sure. Todd?

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

Okay. Thank you.

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

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

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

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

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

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

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

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

Okay. Thank you.

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

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

Yes. So…

I think -- go ahead.

Go ahead, Todd, yes.

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

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

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

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

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

Thank you so much.

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

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

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