Arcutis Biotherapeutics, Inc.

Ladies and gentlemen, thank you for standing by and welcome to our Cuties Biotherapeutics Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then get an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host Eric McIntyre, Head of Investor Relations. Please go ahead.

Thank you, Livia. Good afternoon, everyone, and thank you for joining Arcturus' fourth quarter and full year 2022 earnings call. Slides are available on the Investors section of our website. On today's call, we have Frank Watanabe, President and CEO, Scott Burrows, Chief Financial Officer, Ken Locke, Chief Commercial Officer, and Patrick Burnett, Chief Medical Officer. During this call, I'd remind everyone that we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. We'd encourage you to review the information disclosed in our latest SEC filings. With that, I'll hand the call to Frank.

Thanks, Eric. So I'm on slide five in the deck, which is on our website, if you folks haven't downloaded it yet. 2022 was really a year of exceptional execution for Arcutis and really set us up for great success in 2023 and beyond. Just to recap, we had four successful pivotal phase three trials read out. We had an on-time approval for Zareve and Plaxiriasis. We raised over $300 million to secure a strong balance sheet to support our continuing commercialization and advancing of our pipeline. And we continue to progress in building our pipeline. On slide six, we're making steady progress towards our vision of building one of biotechnology's leading dermatology companies. Some highlights from Q4 and other recent developments. With Zareve, we've got an innovative product that's really well positioned for long-term success with clinically meaningful benefits over alternative treatments. We're seeing very encouraging script growth as physicians gain positive real-world experience with Zareve. And we're also having great success in obtaining broad high quality access. We're delighted today to announce that we've received coverage from the second of the three large major national PBMs effective tomorrow. And Ken's going to comment a little bit more about the access situation. But we're really happy with our rapid progress in obtaining broad high quality coverage for Zareef. We also continued to advance additional indications for topical reform last, capitalizing on what is really turning into a unique pipeline in a product. We had the positive readouts from entanglement 1 and 2 in atopic dermatitis. Very excited about the clinical profile in AD and the approvability of the product in a large and rapidly growing market. We also just recently submitted the NDA for topical reformalized foam and seborrheic dermatitis, and that sets us up for a potential approval late this year or very, very early part of 2024. And we've also already submitted a supplemental NDA for zarebe and plaque psoriasis down to the age of two, which will further read on the safety profile of zarebe and plaque psoriasis. We also continue to progress our early pipeline with the acquisition of ARQ-234, our first biologic for atopic dermatitis, and the Phase 1B initiation of ARQ-255 in alopecia areata, which leverages our unique 4D technology and potentially could be the only topical treatment for alopecia areata. And finally, not only what we accomplish matters, but how we accomplish it matters to us as well. And so we're very proud that we issued our first ESG report in the fourth quarter, highlighting the progress that we're making on these important topics. If you move on to slide number seven, just a reminder of our broad and deep medical dermatology pipeline and the progress that we've made recently since the last call on three programs in particular. I'd call your attention to the three red arrows highlighting some of our recent progress in advancing the pipeline with the NDA and SebDerm, the initiation of Phase 1B for ARQ-255, and the acquisition of and progress on ARQ-234. Turning to slide number eight, there really are four keys to our strategy for the long-term success of Zareve. One is positioning Zareve to replace a significant percentage of topical steroids, which we're going to spend some time talking about today. Secondly, providing a positive clinical experience for doctors and patients when they use Zareve. Third is obtaining broad, high-quality coverage. And lastly is ensuring profitable growth through a rapid stabilization of our growth to NIST. If you turn to slide nine, I want to spend just a couple minutes talking about the first of these four elements of our strategy. And I think it's really important for investors to understand that the key to realizing Zareve's real potential is the conversion of a significant percentage of topical steroids over to Zareve. To give you some context, there are about 12 million prescriptions a year for topical steroids. That's something like a quarter million every week versus 5,000 prescriptions, maybe 6,000 per week, for Zareeb and the other new non-steroidal combined. We're really just scratching the surface in terms of the opportunity for Zareeb. We believe that there are three critical elements for making that conversion happen. The first one is that prescribers need to see a need, a reason to change and move away from topical steroids. The second is that Zareeb needs to provide a product profile that satisfies the needs of prescribers and patients. And the third one is it needs to be as easy to write Zorib as it is for that next topical steroid. That all sounds great, but is that possible? If you go to the next slide, to slide 10, we're showing here several different markets where you had a stable, mature, and generic market, and then an introduction of a new class of drugs. And what you can see in each one of these instances is that there is a very significant conversion over time as well as some significant market growth actually in a couple of these instances with the introduction of that new class of drugs. And so you're looking at examples here from the anticoagulation market, the conversion from warfarin over to factor Xa's, the schizophrenia market, the conversion of neuroleptics over to atypical antipsychotics, the GERD market with conversion of H2s to PPIs, and then most recently, the conversion of the oral migraine market from tryptans over to the oral CGRPs, which is still very early days, but you can see a very rapid conversion trend even in that market. And if you go to slide 11, as you look across all these markets, and we're actually, we were showing also the antidepressant market and the conversion of TCA to SSRI, what you can see is over time, there is a very dramatic shift to the new class of drugs. And that growth, that shift continues throughout the life cycle of the product. And on average, about 50% of these markets all converted by year seven or year eight after the introduction of a new class of drugs. And you think about those 12 million prescriptions I talked about, if 50% of that market converted over to new novel non-steroidals, I think that gives you some sense of the true opportunity for Zareve. So, if you move on to slide 11, you know, sorry, I'm on slide 12. So, I want to take just a moment and have Patrick comment on the first of these three elements around what we're hearing from the dermatology community about the need to shift away from topical steroids. Patrick?

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

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

I'll hand it over now to Patrick for an R&D update.

Thanks, Ken. Starting on slide 21, within the psoriasis community, excitement continues to grow for Zareve. I want to start with some compelling data that we presented at the winter clinical meeting in January, which was very well received by physicians and KOLs. These are data from our 52-week open-label psoriasis study showing durable efficacy with patients maintaining clear or almost clear, that's an IGA of zero or one, for a median duration of about 10 months. Also worth noting is that 57% of patients achieved an IgA of 01 at any point in this 52-week trial. I'm really excited about these data. They've been very easy to interpret for docs and are particularly important to build momentum as patients are coming back to physician's offices with positive experience, and it gives them a clear picture of what to expect as they continue with their treatment. On slide 22 now, physician feedback on AD, the data has been very positive. What continues to jump out is the speed of onset in our trials across both psoriasis and atopic dermatitis, which gives an early indication that the drug is working in the disease. And of course, the ever-important safety and tolerability profile, which has been consistent across all of our programs. Recall Triamcinolone, a mid-potency topical steroid, is a standard of care in AD. And Integument 1 and 2, Zarif demonstrated comparable efficacy within the safety concerns from, considerable efficacy without the safety concerns from chronic use of topical steroids. Taking a closer look at the EZ75 data from Integument 1 and Integument 2 on slide 22, we showed statistical significance at week 1 with clear separation already from vehicle. Then at week 2, about 30% of patients achieved a 75% clearance already from vehicle. and this continued to increase to over 40% at week four, which was the end of treatment. Keep in mind, steroids work quickly, so these data are exactly what physicians want to see. This gets back to the point about driving physician interest and uptake once this product is approved in atopic dermatitis. Turning to slide 23, itch is a critical element for patients. It's the most important early indicator for AD patients for them to know whether or not the drug is working. And here again, we showed statistical significance in separation already at week one, building nicely to nearly a third of patients by week four. Looking forward, we'll showcase some exciting daily itch data at the AAD in a few weeks, which will really nicely characterize the early onset of action of this drug within the itch of atopic dermatitis. On slide 24, I want to touch briefly on safety because safety and tolerability are so critical for this disease, which has a substantial proportion of pediatric patients. This table shows rates for the adverse events in either of our two Phase III trials that had a 2% or greater incidence in any arm. Not looking to go into any detail here. These are just data that we have shown previously. Just key takeaway is to highlight the favorable safety profile, which is consistent with our other programs, including psoriasis. And given that AD is a disease with a skin barrier defect as a key part of the pathophysiology, these patients tend to be sensitive to local adverse events with topicals. And many agents irritate the skin in individuals with atopic dermatitis. Here again, I think we're reaping some benefits from our formulation, which avoids contact irritants like propylene glycol. Finally, turning to slide 25, I have some of our accomplishments and upcoming milestones. You can see significant sustained long-term growth potential with additional approvals, label expansions, both within the U.S. and outside as well. I'm very excited to highlight our SebDerm NDA submission earlier this month, which puts us with a potential approval in late 2023 for the SebDerm foam formulation. Here, physician excitement is palpable for the foam formulation. We're hearing a lot about it when we're talking to derms out in the field, but largely this is being underappreciated, we think, by Wall Street. Coming back around to our most near-term milestone, we have the action date with Health Canada at the end of April for psoriasis. Then next, we have a lot going on in atopic dermatitis in the second half of 2023, the submission of our SNDA for ages 6 and above in AD, as well as top-line data readout for the integument PED study. Again, very excited about the Rufumilast-Cream clinical profile in AD, which I shared with you today, especially the rapid onset of action. And we see this as a significant opportunity for Zareve in this large and growing market. Q4 is the anticipated approval date for the SNDA and psoriasis in children down to the age of two, which Frank mentioned earlier. And finally, we plan a submission for foam for the scalp psoriasis in the first quarter of 2024 after an anticipated seb derm approval. On that note, I'll turn it over to Scott.

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

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

Olivia, we can open the line, please.

Certainly. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question coming from the line of Vikram Purohit from Morgan Stanley. Ilan, it's open.

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

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

We're talking about AD Gristonex. And we expect AD Gristonex trends to come on with coverage.

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

Understood. Thanks a lot. Yep.

Thank you. One moment, please, for our next question. And our next question coming from the line of CMS Fernandez from Gutenheim. Your line is open.

Oh, great. Thanks so much for the questions. Just wanted to get a better sense of, you know, obviously congratulations on bringing forward an additional contract. It sounds like growth to net from the trajectory over the balance of this year is going to improve substantially quarter to quarter. Just wondering if there will also potentially, from your perspective, be a bit of a release in, you know, prescribing capacity as physicians really write scripts for Zareve as the confidence improves that, you know, with each script written, they've got kind of a two-thirds chance of having a fully reimbursed prescription. Just wanted to get a general sense of that. And then incremental to that, just would love to know how you're thinking about the trajectory of the business, you know, particularly with regard to seborrheic dermatitis and how the new foam formulation is likely to slot into those coverage opportunities. Thanks.

I think both of those are for me, right? So I'll start with the sort of confidence and, you know, kind of the two-thirds or 60% shot, which I like that thinking. So, you know, we would expect as coverage improves to obviously be capitalizing on this through targeted messaging to the offices in which, you know, where those patients reside. We do know, you know, kind of geographically where these plans and PBMs impact, and so we're able to target those offices and make sure that they're aware of these updates. I think in the big picture, you're absolutely right, which is as you're writing, the more you write, the more you get, you know, kind of covered, the confidence sort of builds upon itself, and that's the intent. When we talked about the idea of sort of the faster and better coverage leading to ultimate conversion is that one has to have the That sort of underlying confidence with respect to if I'm going to do this, you know, is it worth my time? Is the patient going to end up on the therapy? And so that is the sentiment, and we would expect that to improve. I think, you know, I would say two-thirds. It's probably more of a tipping point than one-third with respect to having, you know, just one on board previously, and I would expect... That should help in terms of, you know, really changing the habits that we see. And ultimately, you know, when we do achieve our access goals of bringing on kind of all three major payers, you know, the messaging will be just, you know, just that, which is, you know, have confidence with this, you know, doctor in terms of writing. You're very likely to get it if your patient is commercially insured, not to mention the fact that, you know, for our uninsured patients, we do have a program as well. So we're trying to really take that pressure off. off the decision making uh in terms of thinking about that you know as a as a almost a criteria for writing it really should be you know um kind of second second nature just like it is a topical core steroid so that would be the desired state uh with respect to what we're seeing so i do believe that you know the confidence will start building and thus the pace Now, I think, Ms.

Frank, just quickly, I think in addition to the two-thirds coverage, the other key piece to that is the lack of a prior authorization, right? Because if doctors are putting in prescriptions and they're getting kicked back from the pharmacies for additional paperwork, that's not as bad as a denial, but it certainly adds to the friction. And having obtained coverage now for two of the three big PBMs without a prior authorization, I think, will be another important facet of prescriber confidence.

So then pivoting back to your question regarding Seb Durham-Chamis. So I think a couple things in play here. So recognizing that the population of patients sort of skews older, it invokes a slightly different insurance mix, right? So we're thinking about a little bit more of government-paid patients, a little bit less commercial-paid patients. So first and foremost, we need to be thinking about that and sort of our aspirations for government-paid insurance types. I think the second thing is that, as I mentioned to Vikram, we should assume that there will be some carryover or transposition of some of our coverage, so to speak, into CebDerm. However, just as we think about government pay and securing things like Medicare coverage, in general, the rebate expectations are higher than that of commercial pay. I'm not 100% sure quite yet how that will play out. It's obviously going to be a mix in terms of overall gross to net, but the price to pay, so to speak, for the government payers is typically higher than that of a commercial pay. However, in some terms, overall, from a net perspective, I'm sorry, from a total proposition standpoint, it's still majority commercial, but the percentage of government pay is about, let's call it 45%.

versus what we see in something like a psoriasis, which is about a third. Okay, Livia, can we go to the next one?

Our next question coming from the lineup, Ken Katiazori with Cowan Yelani Selfman.

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

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

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

Great. Thanks so much.

Thank you. And our next question, coming from the line of, Brad Fraser with Truist.

Good afternoon, folks. Thanks for taking the questions, and congrats on the progress. The conversion analogs that you discussed are notable not just for the uptake of the new differentiated class, but also for overall market growth. Do you see the potential for significant volume growth for the topical psoriasis markets or even other non-steroidal gain traction, or do you think the dynamics for the psoriasis market will be more about conversion from steroids and not necessarily significant growth in topical Rx's.

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

Ken, do you have any additional thoughts, or Patrick? Ken? No. Olivia, can we... Move to the next question. Thanks, Greg.

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

Hi. Thank you for taking my questions here. So first question I have for you is how do you think the uptake for atopic dermatitis, if approved, will be compared to what you see for psoriasis and why? And then secondly, what do you think the read-through is from the adults psoriasis data, sorry, the adult AD data to the pediatric AD data. You know, how should we think about that? And the last question is just thinking about the potential competitive advantages of ARQ234 and when that might enter the clinic. Thank you.

So I'm going to take the first one, and then I'll ask Patrick to talk about the AD read-through and the 234 question. So I think with regard to uptake, I think there certainly is a potential that atopic dermatitis could have a faster uptake for a couple of reasons. The first one is, as Ken mentioned, there could be some acceleration in access decisions for atopic dermatitis just based on psoriasis. The second one is, you know, we have the advantage that doctors are going to have a great deal of familiarity with topical roflumilac when we get the approval in atopic dermatitis. And I think that's particularly important because we know that when we launched Zoriv, you know, there was a certain degree of skepticism about topical PDE4s based on prior experience with the other topical PDE4 inhibitor, and it's taken doctors a little while to dispel some of those anxieties, none of that will be an obstacle to the adoption in atopic dermatitis. And so I think when you pull all of those together, we certainly could see a faster initial uptake in atopic dermatitis. Ken, any other thoughts from your side? Patrick, can you maybe talk about the read-through from Integument 1 and 2 to Integument PEDE and then ARQ234 and some of its advantages in the clinic?

Potential advantages. With regard to the read-through from Integument 1 and Integument 2 to the Integument PEDE trial, keeping in mind that one and two enrolled patients ages six and above, and the Entanglement Peds trial is ages two to five. I think that reading out two successful phase three studies in atopic dermatitis, where we're not really seeing within our data or looking across others' data in atopic dermatitis, a really significant difference in how patients are responding based on their age, and especially considering the fact that Entanglement 1 and 2 included a lot of pediatric patients from the ages of six all the way up and including adolescents up to the age of 17. So we're seeing a very strong read through from entanglement one and two over to the pediatric trial that we're planning to read out in the second half of this year. With regard to 234, You know, we haven't released any timelines with regard to that program right now. We'll probably be in a place later this year to say a little bit more about them. But we do see based off of just the mechanism of action of CD200R, as well as some of the clinical data that's out there, not with ours, but with another CD200R agonist. What we're seeing is that the potential ability of this pathway to have an extended effect on the immune system, not specifically by suppressing the immune system, but by adjusting the response so that it's targeting specifically those pathways that may have been activated. And in the case of diseases like atopic dermatitis, these are pathways that would have been activated, not in response to a signal that needs to be managed, but more kind of pathologically activated is the potential to be able to have a more long term response. And what you might be seeing with aisle 4 and 13, which needs to be dosed quite frequently. as well as an ability maybe to manage this disease without creating any kind of immune suppression. So these are some of the aspects of CZ200R that made it very interesting to us, and we're looking forward to giving you more information about that program as we progress it internally.

Thank you. Thank you. And as a reminder, ladies and gentlemen, to ask a question, please press star 1-1 on your telephone. One moment for our next question. And our next question coming from the line of Rohit Besson with Neham & Company.

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

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

Yeah, and then the question on SG&A trajectory, I would say that we're still obviously quite early in the launch of psoriasis, so you can expect that to grow a little bit as we bring on new sales and marketing tactics over time. And then importantly, we just had our NDA accepted a couple weeks ago for subrheic dermatitis, and so we want to make sure we're well prepared for that launch.

So we'll be, you know, investing ahead of that launch.

That could come as early as, you know, late this year, early next year. So we'll start investing in the launch there.

Thank you.

Thank you. One moment, please, for our next question. And our next question coming from the line of Oyu with Misuho Group. Your line is open.

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

Sure, Roy. So let's first start with the sort of 4,000 vis-a-vis the targeted. So at this point, you know, we think of, you know, the target universe in total between, you know, 12,000 and 13,000 physicians are targeted. We've reached or spoken to about 10,000 of those thus far. And so, you know, gaining momentum in both awareness as well as trial. You know, as for the specifics of why they would or wouldn't, I can't, pinpoint, you know, exactly those reasons. Obviously, sometimes, you know, we need to reach out to them, you know, several times in a row or they need to get some additional confidence, you know, one direction or another, whether clinically, from a colleague, by patient request, or ultimately, you know, kind of seeing or reading about the product a little bit more. But it takes several cycles. In other words, one conversation is typically not enough to get a prescription sort of secured. We obviously are driving as hard as we can, and we continue to look to evaluate other instruments to improve our reach and, more importantly, our frequency of those physicians. So that's all I can really say. I don't really know the absolute by-physician reasons, but for those that have adopted, clearly they've adopted robustly, and we're happy to see that. On the second question, you mentioned the pediatric psoriasis opportunity. Is that what you were asking? Yeah. So that opportunity remains to be, you know, it's pretty small, actually, in terms of absolute prevalence, sort of single-digit percentage prevalence for that group. And so, first and foremost, we wouldn't be looking to expand into pediatrics as a result of this particular opportunity. You know, what this confers for us is really an additional halo or additional opportunity sort of confidence signal in terms of the safety profile of the product. As with, for example, other, like, you know, biologics and such, typically you see that with psoriasis, well, they'll go all the way down to two, recognizing that, you know, really that's more of a marker and sign signal of safety than it is a sort of absolute market opportunity. Where we would do that, obviously, for atopic dermatitis, where the sort of The prevalence of that is significantly higher in pediatrics, and we've spoken before about how we would do that, which is largely through a partnership mechanism with a company that would have a footprint in pediatrics already. I don't know that we would expand our team that much because it's a very large footprint to get into primary care.

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

Okay.

Thank you. Thank you. And I'm showing up for the questions at this time. I would now like to turn the call back over to Mr. Frank Watanabe for any closing remarks.

Okay, so let me first off thank everyone on the Arcutus team. You know, 22, as I think you all have seen, was an exceptional year. That didn't happen by chance. There was a huge amount of work done by what I think is just a phenomenal team of individuals, and I'm delighted to be working with each and every one of them. And secondly, I want to thank our investors for continuing to support us. And lastly, I want to thank all of you for joining in on the call today. So with that, we'll look forward to talking to you all in another three months.

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