ARCUTIS BIOTHERAPEUTICS, INC. (ARQT) - GUGGENHEIM 3RD ANNUAL HEALTHCARE INNOVATION CONFERENCE - ARCUTIS BIOTHERAPEUTICS INC

All right. Welcome, everybody. And thanks for joining us again at Guggenheim's Healthcare Innovation Conference. I'm Seamus Fernandez, one of the senior biopharma analysts here at Guggeheim. And I'm really pleased to be joined again this year by Acutis Biotherapeutics. So to my immediate left is Frank Watanabe, president and CEO, Rob Lesicki, the newly appointed CCO, and Lata Virovan, CFO. So again, going from left to left to left. So, you know, maybe Frank, let's just kind of get started here. You know, it's been a great year, obviously, for Arcutis and Zareev. You've raised 2026 guidance twice and gave it for the first time earlier this year. But in terms of just what's driving the outperformance from your perspective, you know, relative to that original guidance, what is it? And you know how are you looking forward into 2027? So I mean I think that the performance in 26 really is the same reason we saw strong performance in prior years. I think it's a threefold. The first one is the product profile itself. As you know from your doctor talks, right, this is a really product that's very well suited to what clinicians and patients are looking for, both in terms of efficacy and safety, tolerability, and convenience. So it's filling a really important need in the marketplace, and that's what's driven, you know, I think our very, very high share of the brand and non-steroidal market. That's factor number one. Factor number two is, I mean, you know what I'm saying? As you know we're dealing in very, very large markets that have been historically dominated by topical steroids, but there's this ongoing shift away from topical steroids because of all the safety concerns with long-term steroid use and these chronic conditions. And then the third thing, I think the team is, we have an outstanding team. We continue to attract top talent. Rob's addition to the team has been fantastic. We've known each other for decades, very, very experienced dermatology commercial leader. But I think across the board, the strength of our team, along with the large market and the really differentiated product profile has been what has continued to drive the very strong performance of Zareve. And I think in 27, as we look to 27, that is just going to continue. And then we have some really important catalysts that we think are going to translate into even further growth in 27. We expanded the dermatology sales team in 26. We're starting to see the impact of that now, and I think that'll continue on through 27. We've started building out the primary care and pediatric team. We haven't really seen much impact from that yet because it's still, you know, very early days. We're only about three months in to the PEDS and PCP team. But I think in 27, that'll be an important driver. In addition to that, you now, we signed the recent deal with Simone Biles to be one of our spokespeople. She's a fantastic brain ambassador. We're very excited about her raising awareness about both seborrheic dermatitis and eczema Zareev as an opportunity, a new opportunity to treat those conditions. And then lastly, we've got the pediatric approval coming up at the end of February, which we think is going to be a really important catalyst for growth in 27. So, you know, you're taking a very strong business with good momentum going into 27, and then you're layering on top of that a number of very important catalysts. And that's really what's led us to this confidence, bullishness about 27 and beyond that we've talked about in some of our previous conversations. Great. And fourth quarter is seasonally kind of so far been consistently the strongest quarter. You know, is there anything that that is we should keep in mind about this fourth quarter in particular that that could or could possibly be different in any way, shape or form? And then should we anticipate the sort of standard seasonality, the dip post fourth quarter? Yeah, nothing to us would suggest that Q4 of 26 is going to look any different than any other typical Q4. It does tend to be the strongest quarter of the year. You know, the only, I think, comment I would make, just as in Q3, we don't expect to see much in terms of price. We got to our steady state gross net very early this year. I can't exactly say why, other than patients were spending more on health care apparently this year, But, you know, we very quickly got to steady state, and that's why we didn't see much price effect in Q3, and you wouldn't expect to see much price in Q4 either, but you should see some nice volume growth. Okay, great. So maybe a question for Rob. You know, as you sort of come in with your, you Know, extensive experience, you you know, and the time obviously working with on Enbrel with Frank, you know you called Zarif's share you know so far merely the tip of the iceberg, so you know what really surprised you most when you looked under the hood, what do you see as kind of the untapped near-term opportunities in particular? Yeah, on the surprise I'd say two things. One is, externally, it's always hard to measure the esprit de corps of a company. The culture of the company is really special and unique. Everyone has a shared vision and purpose, and companies that have that do perform well. I think the other surprise would be the development success. When you look at the number of phase two, phase three successfully completed studies such a rapid time frame. It's hard to find large companies that have that success. On the opportunity piece, I think the iceberg analogy is perfect. When you think of an iceberg, you see 10% of it above the water, 90% is below. That's where we are right now, right, for branded non-steroidals. We're going to exit the year with 10% of the market being branded nonsteroidal, so 90% of the opportunity is in front of us. Now, the way we get that is through additional indication work. We have studies in Vitiligo and HS. We have the AD infinite indication coming in March. The other is we announced about a week ago a phase three study in AD moderate to severe. So assuming success with all of those studies, you have an asset that essentially can be used cradle to cane, right, in the AD space. So regardless of mild, moderate, or severe, regardless of BSA coverage, and regardless of systemic or biologic use, all of these things, I think, offer the product an extremely exciting future. And what are the aspects, you know, Frank, that unlock the opportunity that we've talked about? You know, I think the street continues to not quite get to the two and a half to three and a halve billion. I think mentally, when we just sort of look at the market, one can get there actually pretty easily. But there's this barrier of, wow, no topical has done that before. So, what is different this time? Well, I think... Helps to have a product that works. It helps to have product that works. But no, I, I that, you know, historically, you know, steroids have been around for 70 years, right? And, and they're the foundation of dermatology, not just topical dermatology but dermatology period because they, they are effective. And historically, the non-steroidals have not been nearly as effective as you know and many of them had tolerability issues and so derms kept using the things that worked in the last five years we've seen three new for new I guess now Brandon not swirls come out you know two of them I think are very good including ours and and that's really driving now a discussion in dermatology about okay it's time now we need to start moving away from topical steroids or topical Steroids are very effective drugs, and they're safe when they're used as directed, which is for short periods of time. Well, these are chronic diseases, right? And so, you know, patients get into safety issues or they end up having to stop their steroid use. Now they have drugs like Zareve that you can use for any duration, for any amount of disease, for, you Know, a whole variety of different indications. And that's really catalyzed this conversation in dermatology around the need to move away from topical steroids. You know, we just saw most recently, I think, you know, the AAD issued new topical guidelines for kids. And for the first time, the Aad said in the guidelines, non-steroid should be preferred over topical steroids because of the long-term safety issues of steroids, right? Finally, the Academy has taken a stand on this. In September, there was a multidisciplinary group of physician groups and patient groups that met in Washington to talk about the need for the FDA to update steroid labels, and they've now petitioned the FDA for that to happen. So there's a growing momentum. And to Rob's iceberg analogy, last year, Derms wrote 16 times more topical steroids than they did brand-new non-steroidals. You do a quick back-of-the-envelope calculation, it doesn't take much of a shift for Zareef to hit that $2.5 to $3.5 billion peak sales that we talked about. Right. 3.5% penetration right now, and if you get to 15 to 20 percent 500 we're already at you know five uh well consensus 542 543 540 well over half a billion right with three and a half percent conversion there's no reason why we can't get to a 15 20 percent share and that delivers two and a halfway and a half billion dollar peak sales yeah so let's talk about vitiligo i mean on the recent call uh you know, we saw some, I think, really striking evidence of what's possible. Yep. You know, outside of what is possible on, you know, sort of individual case reports, you know what are you hoping to see in the upcoming data and what sort of drives that step forward into, you know, vitiligo? And what does it take to convince investors that, you know, this is a real opportunity? It seems to us like it's on the cusp of, you know, educating the market pretty effectively. Yeah. You know, first of all, to be clear, I don't think we should expect to see a result similar to what we showed you guys on Q3. If we did, you knows, that was a really amazing response and a very rapid response. We've seen a number of these case reports published of Zarif working in Vitiligo. We hear about it anecdotally from doctors. And I think importantly, in the AD trial, and especially in the seborrheic dermatitis trial, patients who had post-inflammatory hypopigmentation, we saw that resolve was in a matter of weeks, right? At eight weeks, almost everyone had resolved their PIH. So there's a lot of evidence suggesting that we're working in pigmentary disorders. At the same time, mechanistically, not only are we reducing inflammation the way that, say, a JAK inhibitor would, but there's also quite a bit of science around the role of PD-4s in melanocytes, so we think we're probably also promoting melanogenesis at the same time that you're reducing inflammation. So mechanistically, it makes a ton of sense. We need to see clear evidence that it's working in a reasonable number of patients with a reasonable magnitude in this Phase II study to move forward. Not much more than that, right? And I think if the drug works, because of all the other advantages of Xarev, we're going to be very competitive. we end up having an efficacy advantage we work faster or we have a deeper response or we're able to capture patients who don't respond to other treatments then I think we're looking at you know best-in-class kind of profile for the product but we won't really know that until we get into phase three and commercially when you think about vitiligo there's you know sort of two dynamics that I think offer interesting potential advantages number one not a a lot of treatments available. Right. Number two, this is absolutely ultra chronic as far as I can tell. So in that context, you know, can you just remind us where we are on sort of the average number of tubes for existing indications and then how might this expand that? Sure. Yeah. So what we're seeing with subderm, psoriasis and eczema is that patients are going through around two to three units a year yeah which is exactly what we expected right at launch I think we told the street we expected two to three and that's what we're seeing patients tend to use a little more foam than cream it just is it it's easy to dispense it's easier to spread I think they probably just consume more not that they need more of the foam but we do see that pretty consistently and I think with vitiligo as with all the disease it's really driven by body surface area and the face and the hands are the thing that bother the patients the most, right? So that's the areas that are most likely to treat. You can't cover that up, right, everyone sees that. So at this point in the game, I don't know that we have any reason to think that it's going to be dramatically more drug than what we see in other diseases, but I wouldn't expect anything dramatically less. There could be some upside in vitiligo, but i think we'll have to just see as we get out in the marketplace right okay got it um hs um maybe just the uh the basics of hs and the opportunity for topical and yeah so i mean i think um h s in some respects in my mind is similar to vitiligo right we've got some some now some good biologics that work in hs but like ad you're not getting to 100 responses right even with a biologic so there's a large opportunity to use topicals adjunctively on top of a fourth sorry a 17 AF or on top of a TNF but also there are a lot of mild patients that aren't eligible for biologic therapy but who are going to want to be treated and I think that's another opportunity for us to play in that arena having the foam I think is also an important aspect since this is always occurring in the XLA and the groin and you know most people don't want to be rubbing creams into their groin in their armpits so I think our foam formulation could be a really important differentiator. And then like vitiligo, not only is there an anti-inflammatory mechanism with Zareve, but PDE4 has been pretty well established to have anti-fibrotic capabilities as well. Flumilast works in IPF, for example. So I think that there's a good reason to think that we might have several different mechanisms that we're able to address the HS. And I think investors often forget about the impact of pain and itch in HS, very, very prevalent symptoms. You know, everyone focuses on abscesses and nodules because that's the regulatory endpoint. But for the patient, the pain and the itch can be a big factor. And we've shown over and over again that Zareeb is very effective in itch. We suspect also in pain, probably because PDE4 has an effect on nerve cells and the action potential nerve cells. So, you know, I think we could have, again, a very competitive profile in HS and a unique profile being able to be used across the severity spectrum, monotherapy or combination therapy with biologics, and in this unique foam formulation. Yeah, interesting. Interesting. The pipeline and a product dynamic and the ability to sell effectively with a pipeline and a product, how much does that sort of change the interactions with payers, especially with the context of having both a cream and a foam? How much more does that add to the effective? Yeah, I think there's different rebates between psoriasis and AD. That's really the only kind of difference that I can think of with the payer standpoint. The value, though, from a commercial perspective is the more indications, the more use you have, the more weight you have with a payer. So volume is a helpful thing. It also helps as new entrants come into the market because it makes it more challenging for them to displace those rebate streams. But across all of the put-ups, it doesn't complicate things. It actually makes things easier for us. I'd say in front of the physician as well. Yeah. And when you can use Zareev on most of the things you see every day, it just becomes part of your armament term, becomes a habit at that point. Right. There's some, you know, a lot of questions around capital allocation, business development. You know, we did see recently the Zarev Royalty was acquired by Royalty Pharma from AstraZeneca. Let me just provide a little context, if you can, for the transaction and the implications, if any, for Arcutis at all. Yes, so Latha? Yeah, let's start with the first part and then go to the AZ royalties. So I think our capital allocation strategy is prefaced by what we put out last year at our investor day of growing and expandings or even building our pipeline. So we have been focused on taking leverage and the cash flow that we've built this year and investing in the things that we just talked about, specifically our Salesforce expansions and our marketing efforts and continuing to do that. and you'll see that inflection into 27. And then it's focused on building our pipeline into 234 and anything that we may do on a BD front. And moving to AZ. So AZ, I know we're calling it a sale, but really sort of assigned this royalty to Royalty Pharma. And I think what I want to remind everyone is one Royalty pharma and Frank will say is, and I think he said, as he knows the CEO really well, it's going to do a good deal. So it's really affirms to me the peak sales potential what Zareev can offer and what we said there. And it's a 10-year window in which we owe the royalty from the start of the launch. And our first launch was in late 2022. So if you kind of take that time horizon and what's left, and you do the math, you'll realize that that's in the ballpark of our peak sales. Okay. Very interesting. And financially, it has zero impact on us. Yeah. Yeah, we're just sending the check to somebody else. Right, right. Understood. And to be clear, on the peak sales, we said between $2.3 to $3.3 billion. Yes. Yeah. And then, you know, in terms of the where you ended, you know, Q3, just the cash, you're now cash flow positive, you know, and presumably, is that something that we can assume is likely true from here on out, pretty much every quarter going forward? We said in Q4 of 25, that we will stay cash flow positive throughout the year. So we have been since late last year into 2026. And our intent is to stay that way in 2027. And as we invest, but I don't expect to burn money to invest into Zareve. But if we do BD or anything, then that could change, right? Yeah. And I would say there may be occasional mismatches between expense and revenue where one quarter we might not generate a lot of cash. But I think over a year, you would expect to see steady accumulation. I don't want to commit to every single quarter. March is tough because you have to pay bonus. And you have non-cash expenses as well. But yeah, I mean, I think the trend is very clear. We've done it now four straight quarters. I think we're profitable three of the last four quarters as well, so I think the trajectory... We've been cash flow positive since last year, and we've had quarters of net income positive, 53 out of the four. And I expect to stay that way throughout the end of 26. You know, as you follow the company a long time, we're a very disciplined company when it comes to expenses. Certainly responsible for sure. You know in terms of the business development opportunities, you know, you say kind of nice to have, but not, you know, a necessity, you know in in terms of the you know you also noted 350 assets reviewed over 10 years bought to, and, you know, the deal flow is rising. What are some of the criteria that, you know, think are key fitting? You know, and this has not changed really since we founded the company 10 years ago. You know we focus on large markets with high unmet need, right? We don't want to go after satisfied markets. That's generally not a good strategy. We look at focus on biologically validated targets it doesn't have to be that drug but that mechanism needs to be biologically validated I don't really like taking biological risk and we look for for assets that are really differentiated from other products in the marketplace those are fairly high bars which is why you know we've done so few deals in spite of the number of drugs we've looked at but I would say the deal flow is increasing the teams is very active looking at assets all the time always have been and and I think you know the reason I make the point about this is a nice to have not a must-have is we don't have to do business development right given that the range of opportunities with Zareev and and with 234 we don t have to anything the team has a great record of development as Rob mentioned and so you know if we find an asset and we think there's an opportunity to create shareholder value I would love to do that deal what I don't want to do is a stupid deal that ends up destroying shareholder value, right? That's the key to me. Yep, understood. One of the assets that you did bring in was ARQ234. Maybe just talk about how it fits that sort of business development bucket, and when may we learn more about that profile? Yeah, 234 checked all the boxes. The second box, biologic validation, was the last one to get checked, right? AD is still a large market with still unmet needs in spite of the 413s. And so, you know, we knew this asset looked to be differentiated from the other assets against this target. And then we saw clinical validation on the target, so we went in and we took out the company. We're very excited about the asset. I think it's a really unique way of addressing AD and potentially other autoimmune disorders. We're enrolling the phase one multiple ascending dose right now, and as soon as that's done, we're going to be starting a small proof of concept study, and we'll report out to the street all of the data from the phase 1 trial when we have the POC data, which will give us an indication of biologic activity and whether we're gonna progress into phase 2. If it works in AD, we'll probably be looking at other indications as well for this mechanism. Got it, great. And then just on the IP estate, can you just remind us where the IP estates sits? You have a huge number of patents. We do, we do. Yeah, so we have 28, I think, issued patents now. 24 of them are Orange Book listed, does everyone recall? I don't know why the numbers keep changing all the time because we keep adding. We have patent protection on the cream through 2037. We have patent protection of the foam through 2042. There are four unique patents that only cover the foam. And those range from formulation patents to pharmacokinetic patents to method of use patents. So we have multiple different angles of protection for the products. We feel very strongly about our intellectual property estate, and we're always looking for opportunities to expand it. Got it, great. And then maybe just to wrap up, I mean, if you were to say the one, you know, most underappreciated aspect of the story, it kind of feels like you're getting repeatedly validated on the two and a half to three billion dollar opportunity, including external expensive validation for other players. But, you Know, how should we be thinking about it? Yeah, I think the peak sales potential is probably one of the most under appreciated. This is a look, we're, we'RE, we'Re four years in the psoriasis launch. we're 18 months into the AD launch. We have multiple products now that we're stacking up. We'll do over half a billion a year this year. This narrative that topicals can't be big, it's been disproven by facts. So I think the investment community has to wake up and realize that this is a different world and that Zareev is going to be a multi-billion dollar product. Yeah. I think my favorite thing is somebody told me that this product would never be bigger than $400 million, and in year three, we're already north of $500 and headed to a billion. So congrats on nothing like proving people wrong. That's right. Thanks a lot, Seamus.