Arcutis Biotherapeutics(ARQT) - 2023 Q4 - Annual Report

PART I Part I provides an overview of Arcutis's business, product portfolio, development strategy, competitive landscape, intellectual property, and the various risks it faces Business Arcutis is a commercial-stage biopharmaceutical company focused on developing and commercializing dermatological treatments, primarily ZORYVE, and advancing its pipeline Overview Arcutis is a commercial-stage biopharmaceutical company with lead products ZORYVE cream and foam, and a pipeline targeting various dermatological conditions - Launched ZORYVE cream in August 2022 for plaque psoriasis (ages 12+), with indication expanded to ages 6+ in October 2023, and ZORYVE foam in January 2024 for seborrheic dermatitis (ages 9+)[15][16] - As of February 16, 2024, approximately 165,000 prescriptions for ZORYVE cream and 7,000 prescriptions for ZORYVE foam have been written since their respective launches[15][18] - Submitted a supplemental New Drug Application (sNDA) for ZORYVE cream for atopic dermatitis in patients aged 6+, accepted by the FDA with a PDUFA target action date of July 7, 2024[19] - Acquired Ducentis BioTherapeutics in September 2022, adding ARQ-234 (a CD200R agonist) to the pipeline for atopic dermatitis[21] Our Strategy The company's strategy focuses on commercializing ZORYVE, expanding its indications, building a U.S. and Canadian commercial organization, and advancing its pipeline - Commercialize ZORYVE cream for plaque psoriasis and obtain approval for atopic dermatitis[28] - Commercialize ZORYVE foam for seborrheic dermatitis and seek approval for scalp and body psoriasis[28] - Establish an integrated development and commercial organization, initially targeting U.S. and Canadian dermatology specialists[28] - Further expand the product portfolio through the development of ARQ-255 (alopecia areata) and ARQ-252 (chronic hand eczema, vitiligo)[29] - Develop ARQ-234 as a complementary biologic treatment to ZORYVE for atopic dermatitis[31] Our Portfolio and Pipeline The company's portfolio includes FDA-approved ZORYVE cream and foam, with a pipeline focused on expanding ZORYVE indications and advancing novel dermatological candidates Product Portfolio and Pipeline Summary | Product/Candidate | Indication | Preclinical | Phase 1 | Phase 2 | Phase 3 | NDA Submitted | FDA Approved | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Topical ZORYVE (roflumilast) Cream | Plaque Psoriasis | | | | ✓ | ✓ | ✓ | | | Atopic Dermatitis | | | | ✓ | ✓ | | | ZORYVE (roflumilast) Foam | Seborrheic Dermatitis | | | | ✓ | ✓ | ✓ | | | Scalp and Body Psoriasis | | | | ✓ | | | | ARQ-255 | Alopecia Areata | | ✓ | | | | | | ARQ-252 | Chronic Hand Eczema / Vitiligo | ✓ | | | | | | | Biologic ARQ-234 | Atopic Dermatitis | ✓ | | | | | | ZORYVE (roflumilast) Products ZORYVE, the company's lead roflumilast franchise, includes cream and foam formulations approved for psoriasis and seborrheic dermatitis, with further indications under development - ZORYVE cream is a once-daily topical formulation of roflumilast, a highly potent and selective PDE4 inhibitor, approved for plaque psoriasis in patients 6 years and older[15][36] - ZORYVE foam, also a once-daily roflumilast formulation, was approved in December 2023 for seborrheic dermatitis in individuals aged 9 and older, representing the first new mechanism of action for this indication in over two decades[16][76] - The company is developing ZORYVE cream for atopic dermatitis, with an sNDA under FDA review (PDUFA date July 7, 2024), and ZORYVE foam for scalp and body psoriasis, with an sNDA planned for H2 2024[19][20][77] ARQ-234 ARQ-234 is a highly selective CD200R agonist being developed as a potential biologic treatment for atopic dermatitis, with promising preclinical data - ARQ-234 is a potent and highly selective checkpoint agonist of the CD200 Receptor (CD200R), an immune-regulatory receptor[95] - The company plans to develop ARQ-234 for atopic dermatitis, where it could be a complementary biologic treatment option to ZORYVE cream[97] - Preclinical data for ARQ-234 compared favorably to a clinically-validated CD200R antibody in terms of potency, efficacy, and pharmacokinetics[97] ARQ-255 ARQ-255 is a topical JAK1 inhibitor utilizing a proprietary 4D drug delivery technology for alopecia areata, currently in a Phase 1b study - ARQ-255 is a topical formulation of ivarmacitinib, a selective JAK1 inhibitor, for the treatment of alopecia areata[98] - It uses a proprietary "4D" drug delivery technology to deliver the drug deep into the hair follicle, which is believed to be critical for efficacy in alopecia areata[98] - A Phase 1b study is ongoing, with the first subject in the alopecia areata cohort enrolled in the second quarter of 2023[98][103] ARQ-252 ARQ-252, a topical JAK1 inhibitor for chronic hand eczema and vitiligo, is undergoing reformulation due to prior inadequate drug delivery - ARQ-252 is a topical cream formulation of the JAK1 inhibitor ivarmacitinib, being developed for chronic hand eczema and vitiligo[104] - A prior Phase 1/2b study in chronic hand eczema failed to meet its primary endpoint due to inadequate drug delivery to the skin[104] - The company is currently undertaking reformulation efforts to develop an enhanced version of ARQ-252[104] Competition The company faces intense competition from major pharmaceutical and biotech companies across its target indications, including psoriasis, atopic dermatitis, and alopecia areata - The company faces significant competition from major pharmaceutical, specialty pharmaceutical, and biotechnology companies with greater financial and technical resources[109] - Key competitors for psoriasis include AbbVie (Humira®), Amgen (Otezla®), and Dermavant (tapinarof)[111] - Key competitors for atopic dermatitis include Pfizer (Eucrisa®), Incyte (Opzelura®), and Regeneron (Dupixent®)[111] Commercial Operations Arcutis is building an independent commercial organization and specialty sales force to target dermatologists in the U.S. and Canada, while considering partnerships for other markets - The company has built its own commercial organization and specialty sales force to target dermatologists in the United States and Canada[113] - Arcutis may seek partners to commercialize products to other physicians (pediatricians, allergists, primary care) and in geographic markets outside the U.S. and Canada[113] Intellectual Property The company protects its products through owned and licensed patents, including ZORYVE exclusivity into 2037-2041 and ivarmacitinib patents until at least 2032 - As of Feb 27, 2024, the company owns or has an exclusive license to 20 issued U.S. patents, 40 issued foreign patents, and numerous pending applications[114] - Issued U.S. patents related to roflumilast cream and foam will expire not earlier than June 2037, with a method of treatment patent for roflumilast foam in seborrheic dermatitis expiring in 2041[114] - The company has an exclusive license from Hengrui for patents related to ivarmacitinib (ARQ-252/255), with composition of matter patents not expiring until at least December 2032[116] Exclusive License and Option Agreements Arcutis holds key exclusive license agreements with AstraZeneca for roflumilast, Hengrui for ivarmacitinib, and Huadong for ZORYVE in Greater China and Southeast Asia - Entered an exclusive license agreement with AstraZeneca in July 2018 for worldwide rights to topical roflumilast, involving upfront, milestone, and low to high single-digit royalties on net sales[119][121] - Entered an exclusive option and license agreement with Hengrui in January 2018 for rights to topical ivarmacitinib in the US, Japan, EU, and Canada, including up to $20.5 million in development/regulatory milestones and up to $200.0 million in sales-based milestones, plus tiered royalties[122][123] - In August 2023, entered a license agreement with Huadong for ZORYVE in Greater China and Southeast Asia, receiving a $27.0 million net upfront payment and rights to potential future milestones and royalties[126][128] Government Regulation The company's operations are subject to extensive and complex government regulations, including FDA approval processes, manufacturing standards, healthcare fraud and abuse laws, and healthcare reform legislation - The company is subject to extensive regulation by the FDA and other authorities covering all aspects of product development, from nonclinical testing (GLP) and clinical trials (GCP) to manufacturing (cGMP) and post-approval marketing[131][132] - The Hatch-Waxman Act provides pathways for generic drug approval (ANDA) and creates periods of market exclusivity for new drugs, which is critical for the company's commercial success[160][164][165] - The company must comply with various healthcare laws, including the federal Anti-Kickback Statute, False Claims Act, and the Physician Payments Sunshine Act, which regulate interactions with healthcare professionals and payers[167][169] - Healthcare reform, including the Affordable Care Act (ACA) and the Inflation Reduction Act (IRA), has introduced measures like drug price negotiations with Medicare and inflation-based rebates, which could impact future revenue and profitability[179][181] Risk Factors The company faces significant financial, commercialization, development, third-party reliance, intellectual property, and regulatory risks, including substantial doubt about its going concern ability Risks Related to Financial Condition and Capital Requirements The company faces significant financial risks due to limited operating history, substantial losses, and the need for additional capital, raising going concern doubts - The company has incurred significant losses since inception, with a net loss of approximately $262.1 million for the year ended December 31, 2023, and an accumulated deficit of $981.9 million[190] - A minimum financing covenant in the loan agreement with SLR requires raising $31.0 million by April 1, 2024, and failure to comply raises substantial doubt about the company's ability to continue as a going concern, as noted by its auditor[193] - The company may require substantial additional financing, and failure to obtain it could force delays, reductions, or termination of product development and commercialization efforts[194] Risks Related to Development and Commercialization Commercialization and development risks include market acceptance, reimbursement challenges, lengthy and uncertain clinical trials, and intense competition from larger companies - The business is dependent on the successful commercialization of ZORYVE and the development and approval of its other product candidates[212][214] - Even if approved, product candidates may fail to achieve market acceptance from physicians, patients, and payers, which is necessary for commercial success[218][219] - Clinical drug development is a lengthy, expensive, and uncertain process, where delays or failures can occur at any stage and may prevent or delay commercialization[226][227] - The company faces significant competition from other biotechnology and pharmaceutical companies, many of which have substantially greater financial, technical, and human resources[259][260][266] Risks Related to Reliance on Third Parties The company heavily relies on third-party manufacturers and CROs, many of which are single-source, posing risks to supply, quality, and development timelines - The company relies on third-party manufacturers, many of which are single-source, for all supplies of ZORYVE and its product candidates, and loss or failure of these suppliers would materially and adversely affect the business[297][298] - If contract manufacturers fail to comply with cGMP or other regulations, the company could face fines, recalls, or suspension of production[301][304] - The company relies on third parties like CROs to conduct nonclinical studies and clinical trials, and if these parties do not perform their duties successfully, regulatory approval for product candidates could be delayed or prevented[305][306] Risks Related to Intellectual Property Intellectual property risks include challenges to patent validity, potential infringement claims, and the recent Paragraph IV notice from Padagis regarding ZORYVE cream - The company's ability to protect its products depends on obtaining and maintaining valid and enforceable patents, which is an uncertain process[308][309] - On February 14, 2024, the company received a Paragraph IV Notice Letter from Padagis, which submitted an ANDA to the FDA to market a generic version of ZORYVE cream, challenging the validity and enforceability of the company's patents[312][328] - The company may become subject to claims of infringing third-party patents, which could lead to costly litigation, substantial damages, and potentially block the commercialization of its products[319][321] - Failure to comply with obligations under license agreements with partners like AstraZeneca and Hengrui could result in the loss of necessary intellectual property rights[350] Risks Related to Government Regulation Extensive and evolving government regulations, including healthcare fraud and abuse laws and reform legislation, pose significant compliance and financial risks - Even after approval, products are subject to extensive and ongoing regulatory obligations, and failure to comply can result in fines, marketing restrictions, or product withdrawal[360][361] - The company is subject to healthcare fraud and abuse laws, such as the Anti-Kickback Statute and False Claims Act, and could face substantial penalties for non-compliance[367][370] - Recent and future legislation, such as the Inflation Reduction Act (IRA), may increase the difficulty and cost of commercialization and negatively affect product prices[373][377] - Improper promotion of products for off-label uses could lead to significant fines, penalties, and damage to the company's reputation[385][387] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[421] Cybersecurity The company maintains a NIST-guided cybersecurity risk management program overseen by the Audit Committee, with no material threats or incidents identified - The company has developed a cybersecurity risk management program guided by the NIST Cybersecurity Framework, which includes risk assessments, a dedicated security team, employee training, an incident response plan, and third-party risk management[421][422] - The Board's Audit Committee oversees cybersecurity risk, receiving at least quarterly reports from management, and the security team is led by the Head of Core Technology & Security, who has over 20 years of IT experience[425][427] - The company has not identified any risks from known cybersecurity threats or prior incidents that have materially affected or are reasonably likely to materially affect its operations, business strategy, or financial condition[424] Properties The company's corporate headquarters is located in Westlake Village, California, where it leases approximately 22,643 square feet of office space - The company leases approximately 22,643 square feet of office space in Westlake Village, California for its corporate headquarters[429] Legal Proceedings The company is not currently a party to any material litigation or other material legal proceedings - The company is not currently a party to any material legal proceedings[430] PART II Part II covers the company's common stock market, financial condition, results of operations, market risks, and financial statements Market For Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities The company's common stock trades on Nasdaq under 'ARQT' with approximately 71 record holders, and no cash dividends have been paid or are anticipated - Common stock trades on The Nasdaq Global Select Market under the symbol "ARQT"[432] - As of February 21, 2024, there were approximately 71 holders of record of the common stock[433] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[434] Management's Discussion and Analysis of Financial Condition and Results of Operations The company reported $59.6 million in 2023 revenue and a $262.1 million net loss, with R&D decreasing and SG&A increasing, raising going concern doubts due to a financing covenant Results of Operations In 2023, total revenues significantly increased to $59.6 million, while net loss decreased to $262.1 million, driven by lower R&D and higher SG&A expenses Results of Operations Comparison (2023 vs 2022) | Financial Metric | 2023 (in thousands) | 2022 (in thousands) | Change $ (in thousands) | Change % | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $59,606 | $3,686 | $55,920 | 1517% | | Cost of sales | $4,987 | $754 | $4,233 | 561% | | Research and development | $110,575 | $182,435 | ($71,860) | (39)% | | Selling, general and administrative | $185,145 | $122,124 | $63,021 | 52% | | Loss from operations | ($241,101) | ($301,627) | $60,526 | (20)% | | Net loss | ($262,140) | ($311,458) | $49,318 | (16)% | - The decrease in R&D expenses was primarily due to the completion of Phase 3 studies for ZORYVE cream in atopic dermatitis and ZORYVE foam in seborrheic dermatitis and scalp psoriasis, as well as a one-time IPR&D expense in 2022 from the Ducentis acquisition[468] - The increase in SG&A expenses was driven by higher compensation, sales and marketing expenses, and professional services costs related to commercialization efforts for ZORYVE[469] Liquidity, Capital Resources and Requirements As of December 31, 2023, the company held $272.8 million in liquidity but faces substantial doubt about its going concern ability due to a $31 million financing covenant not yet met Cash and Liquidity Position | Metric | Dec 31, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | Cash, cash equivalents, restricted cash, and marketable securities | $272.8 | $410.8 | | Accumulated deficit | ($981.9) | ($719.8) | | Long-term debt outstanding | $200.0 | $200.0 | - An amendment to the loan agreement with SLR requires the company to raise $31 million in net cash proceeds by April 1, 2024, a covenant it has not complied with as of the report date[476] - The uncertainty regarding the ability to comply with the financing covenant raises substantial doubt about the company's ability to continue as a going concern[476] Cash Flow Summary (Year Ended Dec 31, 2023) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Net Cash Used in Operating Activities | ($247.1) | | Net Cash Provided by Investing Activities | $180.2 | | Net Cash Provided by Financing Activities | $101.3 | Critical Accounting Policies and Use of Estimates Critical accounting policies involve significant estimates for revenue recognition (variable consideration), nonclinical and clinical accruals, stock-based compensation, and income taxes - Revenue Recognition: Involves significant estimates for variable consideration, including government and private payer rebates, chargebacks, product returns, and co-pay assistance programs, which are deducted from gross sales[507][509] - Nonclinical and Clinical Accruals: Costs for R&D activities conducted by third parties are accrued based on estimates of work completed, requiring significant judgment and reliance on reporting from CROs and other vendors[505] - Stock-Based Compensation: The fair value of stock options is calculated using the Black-Scholes model, which requires subjective assumptions for expected term, volatility, and other inputs[515] - Income Taxes: The company maintains a full valuation allowance against its net deferred tax assets of $216.2 million due to a history of losses and uncertainty about future realization[521] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks, including interest rate sensitivity on its $200 million floating-rate debt and unhedged foreign currency exchange risk from its Canadian subsidiary - The company has $200.0 million in outstanding floating-rate debt, where a 100 basis point (1%) increase in interest rates would increase annual interest expense by approximately $2.0 million[523] - The company is exposed to foreign currency exchange risk through its Canadian subsidiary, which operates with the Canadian dollar as its functional currency, and does not currently hedge this risk[524] Financial Statements and Supplementary Data This section presents the consolidated financial statements and the auditor's report, which includes a going concern doubt and highlights sales deduction estimation as a critical audit matter - The Report of Independent Registered Public Accounting Firm includes an explanatory paragraph stating that substantial doubt exists about the Company's ability to continue as a going concern due to its failure to meet a capital-raising requirement under its loan agreement[551] - The critical audit matter identified by the auditor was the estimation of accrued sales deductions, specifically related to co-pay assistance programs and managed care rebates, due to the complexity and judgment involved[556][557] Consolidated Balance Sheet Summary (As of Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Assets | | | Total current assets | $330,431 | | Total assets | $341,365 | | Liabilities and Stockholders' Equity | | | Total current liabilities | $46,668 | | Long-term debt, net | $201,799 | | Total liabilities | $252,698 | | Total stockholders' equity | $88,667 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes reported - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[527] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[528] PART III Part III covers corporate governance, executive compensation, security ownership, related party transactions, and accounting fees, primarily by reference to the proxy statement Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement, including the company's insider trading policy - The company has adopted an insider trading policy that governs the trading of its securities by directors, officers, and employees, and prohibits short sales, options trading, and hedging transactions[534] - Other required information for this item is incorporated by reference from the forthcoming 2023 Annual Meeting Proxy Statement[535] Executive Compensation Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders[536] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders[536] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders[536] Principal Accounting Fees and Services Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders[538] PART IV Part IV details the exhibits and financial statement schedules included in the report, such as key agreements and auditor's reports Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and a comprehensive array of exhibits, including key corporate and licensing agreements - This section contains the consolidated financial statements and the report of the independent registered public accounting firm[541] - A list of exhibits is provided, including key agreements such as the license agreement with AstraZeneca, the exclusive option and license agreement with Hengrui, and the loan and security agreement with SLR Investment Corp[543][545]