Arcutis Biotherapeutics, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Dollar amounts below are in millions unless stated otherwise. The company is an early commercial-stage dermatology biopharmaceutical company; ZORYVE is its first commercial product.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Product revenue, net | $8.1 | $0.7 | $15.7 | $0.7 |
| Other revenue | $30.0 | — | $30.4 | — |
| Total revenue | $38.1 | $0.7 | $46.1 | $0.7 |
| Operating expenses | $75.0 | $105.5 | $226.0 | $233.9 |
| Operating loss | $(36.9) | $(104.7) | $(179.9) | $(233.2) |
| Net loss | $(44.8) | $(107.7) | $(195.9) | $(239.4) |
| Basic and diluted loss per share | $(0.73) | $(1.89) | $(3.19) | $(4.52) |
- Q3 product revenue grew by $7.4 million year over year, which management attributed primarily to end-customer demand. The $30 million Q3 other-revenue item was the nonrefundable upfront payment under the Huadong license; the company recorded $3 million of related withholding-tax expense.
- Q3 operating expenses declined 29%, principally because the prior-year quarter included a $29.6 million acquired in-process R&D charge and because several Phase 3 trials had been completed. Nine-month R&D fell 42%, while SG&A rose 60% to $136.5 million, primarily reflecting ZORYVE commercialization. Q3 SG&A increased 34% to $47.6 million.
- Interest expense increased to $7.6 million in Q3 and $22.0 million for the first nine months, reflecting higher rates and debt-related costs. The loan rate was 12.88% at September 30; management estimated each 100-basis-point rate increase would add about $2.0 million of annual interest expense.
- Cash, cash equivalents, restricted cash and marketable securities totaled $228.0 million at September 30, down from $410.8 million at year-end 2022. Nine-month operating cash use was $190.8 million versus $186.7 million a year earlier. Investing activities provided $242.4 million, mainly from marketable-security maturities; financing activities provided $2.0 million.
- Current assets were $281.5 million and current liabilities $41.9 million. Long-term debt was $200.8 million net of discount, against $200.0 million principal outstanding. Total liabilities were $246.2 million and stockholders’ equity $46.7 million. Debt is secured by substantially all assets, including intellectual property, subject to exceptions.
Material developments, outlook and risks
- Commercial and pipeline progress: ZORYVE launched in the U.S. in August 2022 and in Canada in June 2023. After quarter-end, FDA approval expanded its plaque-psoriasis indication to ages six and older; the company said it was working toward a potential expansion to ages two and older. The company filed an sNDA for roflumilast cream in atopic dermatitis in September 2023, with possible FDA action as early as Q3 2024. It reported positive topline results from the pediatric atopic-dermatitis Phase 3 study and positive interim results from its extension study. The FDA had accepted the roflumilast-foam NDA for seborrheic dermatitis, with a target action date of December 16, 2023; a Q1 2024 launch was anticipated if approved.
- Huadong agreement: Huadong received regional rights to develop and commercialize topical roflumilast in Greater China and Southeast Asia. Arcutis received $30 million upfront before $3 million of withholding tax, and may receive up to $24.0 million in development/regulatory milestones, up to $40.3 million in sales milestones, and tiered royalties.
- Post-quarter financing: On October 24, 2023, the company raised $94.0 million net through an offering of 32.5 million common shares and prefunded warrants for 7.5 million shares. Underwriters also received an option to buy up to 6.0 million additional shares.
- Debt amendment and covenant risk: A November 1 amendment eliminated the undrawn $25 million tranche, set a minimum product-revenue covenant at 75% of monthly projected revenue in the approved annual plan (tested on a trailing 12-month basis for December 2023 and then six-month basis), and imposed a requirement to raise at least $31 million in net cash proceeds from eligible sources between November 1, 2023 and April 1, 2024. Failure to meet the financing requirement or deliver the annual plan by December 15 may trigger an immediate default. The October offering predates the stated financing-covenant period.
- Management expects continued losses and significant commercialization and development spending, but said existing capital resources were expected to cover projected operating requirements for at least 12 months from issuance of the financial statements. Additional financing may be needed; it may not be available on acceptable terms. The company also relies on third parties, including some single-source suppliers, for manufacturing and supply.
- Other items: the company reported no material litigation and no material changes to previously disclosed risk factors other than the added debt-covenant risk. Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2023.
Investor facts to verify
- Whether ZORYVE product demand, net revenue growth and customer deductions support the company’s commercialization expectations.
- FDA decisions and timing for roflumilast foam and the atopic-dermatitis applications, and the related launch and development costs.
- Compliance with the amended revenue and financing covenants, including the $31 million proceeds requirement and approved annual-plan deadlines.
- Cash runway and financing needs relative to operating cash use, the $200 million debt balance, its floating interest rate, and January 2027 maturity.
- Potential dilution from the October offering and prefunded warrants, as well as progress and economics under the Huadong license.