Arcutis Biotherapeutics(ARQT) - 2024 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents Arcutis Biotherapeutics, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, with accompanying notes detailing accounting policies, revenue, debt, and stock-based compensation Condensed Consolidated Balance Sheets | Balance Sheet Highlights (in thousands) | September 30, 2024 (unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $134,851 | $88,398 | | Marketable securities | $195,710 | $183,463 | | Total current assets | $423,720 | $330,431 | | Total assets | $437,354 | $341,365 | | Liabilities & Equity | | | | Total current liabilities | $172,426 | $46,668 | | Long-term debt, net | $105,095 | $201,799 | | Total liabilities | $280,713 | $252,698 | | Total stockholders' equity | $156,641 | $88,667 | - Total assets increased to $437.4 million as of September 30, 2024, from $341.4 million at year-end 2023, primarily driven by an increase in cash, marketable securities, and trade receivables[7] - A significant portion of long-term debt ($99.5 million) was reclassified to current liabilities as of September 30, 2024, in anticipation of a partial prepayment made in October 2024[7][71] Condensed Consolidated Statements of Operations and Comprehensive Loss | Operating Results (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $44,755 | $38,109 | $125,182 | $46,080 | | Product revenue, net | $44,755 | $8,109 | $97,182 | $15,660 | | Total operating expenses | $83,821 | $75,013 | $245,947 | $226,012 | | Loss from operations | ($39,066) | ($36,904) | ($120,765) | ($179,932) | | Net loss | ($41,537) | ($44,765) | ($129,251) | ($195,856) | | Net loss per share | ($0.33) | ($0.73) | ($1.08) | ($3.19) | - Product revenue for Q3 2024 surged to $44.8 million, a 452% increase from $8.1 million in Q3 2023, driven by the launch of new ZORYVE products and increased demand[10][127] - Net loss for the nine months ended September 30, 2024, narrowed to $129.3 million from $195.9 million in the prior-year period, primarily due to significantly higher product revenue and a decrease in R&D expenses[10][140] Condensed Consolidated Statements of Cash Flows | Cash Flow Summary (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | ($111,410) | ($190,813) | | Net cash (used in) provided by investing activities | ($6,057) | $242,418 | | Net cash provided by financing activities | $163,613 | $2,034 | | Net increase in cash, cash equivalents, and restricted cash | $46,145 | $53,521 | - Cash used in operating activities decreased to $111.4 million in the first nine months of 2024 from $190.8 million in the same period of 2023, reflecting improved operational performance and revenue growth[17][169] - Financing activities provided $163.6 million in cash, primarily from a common stock issuance in February 2024 which raised net proceeds of $161.7 million[17][23][173] Notes to Financial Statements - The company is a commercial-stage biopharmaceutical firm focused on dermatological diseases, receiving FDA approval for ZORYVE cream 0.15% for atopic dermatitis in July 2024 and commencing commercialization shortly thereafter[19][20] - In February 2024, the company completed a common stock offering, raising aggregate net proceeds of $161.7 million[23] - As of September 30, 2024, the company had cash, cash equivalents, restricted cash, and marketable securities totaling $331.2 million, believing its capital resources are sufficient for at least the next 12 months[26][27] - Subsequent to the quarter end, on October 8, 2024, the company made a partial prepayment of $100.0 million on its outstanding loan[96] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's commercial performance, highlighting the successful launches and revenue growth of its ZORYVE franchise, detailing the significant increase in product revenue and narrowing net loss, and covering strategic shifts in operating expenses and sufficient liquidity for the next 12 months Overview - The company is focused on commercializing its ZORYVE franchise, which now includes treatments for plaque psoriasis (cream 0.3%), seborrheic dermatitis (foam 0.3%), and atopic dermatitis (cream 0.15%)[100][101][102] - A co-promotion agreement was signed with Kowa Pharmaceuticals in July 2024 to market ZORYVE to primary care practitioners and pediatricians, expanding commercial reach beyond dermatology[105] - Pipeline development continues with ARQ-255 for alopecia areata (Phase 1b data expected H1 2025) and ARQ-234 for atopic dermatitis (IND submission planned for 2025)[106][107] Results of Operations | Product Revenue, Net (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | ZORYVE cream 0.3% | $22,041 | $8,109 | $13,932 | 172% | | ZORYVE foam | $20,262 | $— | $20,262 | N/A | | ZORYVE cream 0.15% | $2,452 | $— | $2,452 | N/A | | Total | $44,755 | $8,109 | $36,646 | 452% | - Q3 2024 R&D expenses decreased by 26% YoY to $19.5 million, primarily due to the completion of Phase 3 studies for roflumilast cream in atopic dermatitis[127][134] - Q3 2024 Selling, General, and Administrative (SG&A) expenses increased by 24% YoY to $58.8 million, driven by higher personnel costs and marketing expenses to support the commercialization of ZORYVE[127][136] - For the nine months ended Sep 30, 2024, total revenue grew 172% to $125.2 million, while net loss improved by 34% to $129.3 million compared to the same period in 2023[140] Liquidity and Capital Resources - As of September 30, 2024, the company had $331.2 million in cash, cash equivalents, restricted cash, and marketable securities[155] - The company had $200.0 million in debt outstanding as of September 30, 2024, and on October 8, 2024, made a $100.0 million partial prepayment, reducing the principal to $100.0 million but retaining the right to re-draw the funds for a defined period[155][160] - Following the debt prepayment, the loan's maturity date was extended to August 1, 2029, and the interest rate was revised, with options to draw down two additional tranches (C-1 and C-2) of up to $50.0 million each, subject to meeting revenue targets[160] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate sensitivity on its variable-rate debt and foreign currency exchange risk from its Canadian subsidiary, with no current use of hedging instruments for these exposures - The company is exposed to interest rate risk on its floating-rate debt; a 100 basis point (1%) increase in interest rates would result in approximately $1.0 million of additional annual interest expense on the remaining $100.0 million of debt[178] - Foreign currency exchange risk is present due to the Canadian subsidiary, with the company holding cash balances of $4.5 million denominated in Canadian dollars as of September 30, 2024[179] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2024, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO have concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[180] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[181] PART II OTHER INFORMATION Legal Proceedings Arcutis has filed a patent infringement lawsuit against Padagis concerning its attempt to market a generic version of ZORYVE® 0.3% cream, asserting infringement of eleven patents and triggering an automatic 30-month stay preventing FDA approval until August 2026 - The company filed a lawsuit against Padagis on March 27, 2024, for patent infringement related to a generic version of ZORYVE® 0.3% cream[186] - The lawsuit triggers an automatic 30-month stay of FDA approval for Padagis's generic product, which is set to expire on August 14, 2026[187] Risk Factors This section updates risk factors, focusing on the implications of transitioning to a 'large accelerated filer,' which will increase compliance costs and reporting requirements, and highlights risks associated with strategic collaborations and restrictive covenants of its loan agreement - The company will become a 'large accelerated filer' and will no longer qualify as a 'smaller reporting company' starting Q1 2025, leading to heightened disclosure requirements and compliance costs[190][191] - The success of collaboration agreements (e.g., with Huadong, Sato, Kowa) is not guaranteed and depends heavily on the efforts of partners, posing risks to development and commercialization[192][193] - The loan agreement contains restrictive covenants, including a minimum net product revenue requirement, which could limit operational flexibility, and an event of default could lead to debt acceleration[195][197][198] Other Information This section reports that no directors or officers adopted or terminated Rule 10b5-1 trading plans during the quarter and announces Keith Leonard's election as Chair of the Board, effective November 4, 2024 - Keith Leonard was elected to serve as Chair of the Board, effective November 4, 2024[202]