Arcutis Biotherapeutics, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Arcutis is an early commercial-stage biopharmaceutical company focused on dermatology. It began U.S. sales of ZORYVE for plaque psoriasis in August 2022 and launched in Canada in June 2023.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $5.2m | $0 | $8.0m | $0 |
| Net product revenue | $4.8m | $0 | $7.6m | $0 |
| Cost of sales | $0.8m | $0 | $1.6m | $0 |
| Research and development | $25.2m | $38.2m | $60.6m | $78.8m |
| Selling, general and administrative | $46.0m | $27.6m | $88.9m | $49.6m |
| Net loss | $71.0m | $67.4m | $151.1m | $131.7m |
| Net loss per share | $1.16 | $1.31 | $2.46 | $2.58 |
| Cash used in operating activities | — | — | $146.8m | $119.0m |
At June 30, cash, cash equivalents, restricted cash and marketable securities totaled $269.6m, down from $410.8m at December 31, 2022. Long-term debt was $200.0m principal ($199.8m net carrying value); stockholders’ equity was $80.5m, versus $209.6m at year-end. The company reported an accumulated deficit of $870.9m.
Reported cost of sales was $0.8m in Q2 against $4.8m of net product revenue. No operating profit or positive net income was reported. Six-month investing cash inflow of $196.9m principally reflected maturities of marketable securities, not operating cash generation.
Changes versus prior comparable periods
- Sales commenced after ZORYVE’s 2022 U.S. launch; Q2 2023 included $4.8m of net product revenue and $0.4m of other revenue. Other revenue arose from shares issued by Iolyx under the collaboration agreement.
- Q2 net loss increased $3.6m year over year; the six-month net loss increased $19.4m. SG&A rose 66% in Q2 and 79% for the six months, mainly from commercialization staffing, sales and marketing, and professional services.
- R&D declined 34% in Q2 and 23% for the six months, primarily because pivotal studies were completed and certain manufacturing costs shifted from R&D to inventory after ZORYVE approval.
- Interest expense increased to $7.3m in Q2 and $14.4m for the six months, reflecting higher debt and rates. Other income rose, primarily because of higher interest rates on investments.
- Operating cash use increased by $27.9m year over year for the first half. The cash and securities balance declined despite investing cash inflows, which largely represented portfolio maturities.
Outlook, risks and unusual items
- Management expects continued losses and significant expenses, including ZORYVE commercialization and development of product candidates. It believes existing capital resources will cover projected operating needs for at least 12 months from issuance of the financial statements; additional financing may be needed if assumptions or cash flows fall short.
- Planned milestones included potential FDA action on the ZORYVE plaque-psoriasis age expansion in Q4 2023; an atopic dermatitis sNDA for patients six and older in late Q3 or early Q4 2023; topline pediatric atopic dermatitis data in Q3 2023; and a December 16, 2023 FDA target action date for roflumilast foam in seborrheic dermatitis. If approved, management expected a Q1 2024 launch. These are forward-looking expectations, not reported outcomes.
- The $200m SLR debt bears a floating rate, 12.61% at June 30, 2023; the effective rate was 14.61%. SOFR replaced the prior benchmark in July 2023. A 100-basis-point rate increase would add approximately $2.0m of annual interest expense. Debt matures January 2027 and is secured by substantially all assets, including intellectual property.
- A revenue-based loan covenant begins with the month ending December 31, 2023, subject to a market-capitalization exception. The company was compliant at June 30. An additional $25m tranche is conditional on specified requirements, including a trailing six-month net product revenue milestone of $110m.
- Firm ZORYVE manufacturing commitments were approximately $4.9m for the following six months and $0.8m annually in 2024 and 2025. Ducentis acquisition contingent milestone payments could reach approximately $400m; none were considered probable or recorded at June 30.
- Key risks include uncertain product uptake and reimbursement, clinical and regulatory outcomes, reliance on third-party and single-source manufacturers, financing needs, variable-rate debt, and potential future milestone and royalty obligations. No material litigation was reported. Management stated disclosure controls and internal control over financial reporting were effective at June 30.
Important facts for investors to verify
- Subsequent ZORYVE sales, prescription demand, net pricing, rebates, returns and commercial launch economics in the U.S. and Canada.
- Progress and actual regulatory decisions for the planned psoriasis age expansion, atopic dermatitis applications, and roflumilast foam NDA.
- Cash burn, remaining liquidity runway, availability conditions for the additional debt tranche, and compliance with the revenue covenant.
- Floating-rate debt costs, required loan fees and maturity obligations, plus the effect of any future financing on dilution and collateral.
- Manufacturing supply reliability and commitments, and whether contingent acquisition or license milestones become probable or payable.