Arcutis Biotherapeutics, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is an early commercial-stage dermatology biopharmaceutical company. ZORYVE (roflumilast) cream, its first approved product, launched in the U.S. in August 2022 for plaque psoriasis in patients 12 and older.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net product revenue | $2.8 million | None |
| Cost of sales | $0.8 million | None |
| Gross profit / gross margin | $2.0 million / approximately 72% | Not applicable |
| Research and development | $35.3 million | $40.6 million |
| Selling, general and administrative | $42.9 million | $22.0 million |
| Operating loss | $76.3 million | $62.6 million |
| Net loss | $80.1 million | $64.3 million |
| Net loss per share, basic and diluted | $1.31 | $1.27 |
| Cash used in operating activities | $80.3 million | $57.0 million |
The reported gross margin should be viewed in context: costs for inventory manufactured before ZORYVE’s FDA approval were expensed earlier as R&D, so cost of sales is expected to reflect lower average material costs until that inventory is sold, which the company expects over the next two years.
At March 31, 2023, cash and cash equivalents were $81.4 million, restricted cash was $0.9 million, and marketable securities were $251.0 million; combined liquidity was $333.3 million, down from $410.8 million at December 31, 2022. Total assets were $379.5 million and stockholders’ equity was $139.7 million. Long-term debt was $198.8 million net ($200.0 million principal); the variable interest rate was 12.12%. The company reported $37.0 million of current liabilities. Management believes existing capital resources will fund projected operating requirements for at least 12 months from issuance of the financial statements.
Changes versus the prior-year quarter
- Revenue began following the 2022 ZORYVE launch; Q1 2023 net product revenue was $2.8 million versus none in Q1 2022.
- R&D expense fell 13%, mainly as pivotal roflumilast studies were completed, partly offset by a $3.0 million FDA filing fee and higher personnel and other costs.
- SG&A rose 95%, primarily from commercialization, including higher compensation and sales and marketing costs.
- Operating cash use increased from $57.0 million to $80.3 million. Net loss widened 25% to $80.1 million.
- Interest expense increased to $7.0 million from $1.8 million, reflecting the larger debt balance and higher rates. Interest income also rose, to $3.2 million from $0.1 million.
Outlook, risks and contingencies
- Company outlook: No specific revenue or earnings guidance is provided. The company expects continued losses and significant commercialization and development spending. It says it may need additional financing if available resources and future operating cash flows are insufficient; financing may not be available on acceptable terms.
- Pipeline and regulatory milestones: The company expected a decision in Q4 2023 on its application to expand ZORYVE cream use in plaque psoriasis to patients as young as two. It expected to submit an atopic dermatitis application for patients six and older in late Q3 or early Q4 2023, and reported in May 2023 that the youngest-patient study had completed enrollment, with topline data expected in Q3 2023. FDA accepted the roflumilast foam application for seborrheic dermatitis in April 2023, with a target action date of December 16, 2023; a Q1 2024 launch was anticipated if approved. The company expected a potential foam application for scalp and body psoriasis in Q1 2024. These are forward-looking expectations, not guarantees.
- Program prioritization: Development of ARQ-252 was paused to prioritize ZORYVE commercialization and follow-on roflumilast indications. ARQ-255 is in a Phase 1b study for alopecia areata; ARQ-234 is a preclinical-stage candidate for atopic dermatitis.
- Debt and liquidity: The $200.0 million loan bears floating interest and is due January 1, 2027. A 100-basis-point rate increase would add approximately $2.0 million of annual interest expense. The loan is secured by substantially all assets, including intellectual property. A product-revenue covenant begins in December 2023; the filing does not clearly state its required revenue thresholds. Up to $25.0 million of additional loan funding is conditional, and a separate $25.0 million tranche requires a $110.0 million trailing-six-month net product revenue milestone.
- Commitments and contingencies: Firm manufacturing purchase commitments were approximately $5.1 million for the following nine months and $0.8 million annually in 2024 and 2025. Potential Ducentis development, regulatory and commercial milestone payments could total approximately $400 million; none were considered probable or recognized at March 31, 2023. Other license milestone obligations are also contingent. No material litigation, off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported.
- Controls: Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2023.
Important facts for investors to verify
- Whether ZORYVE prescription demand, net sales, payer access and discounts improve enough to support commercialization costs and meet loan covenant requirements.
- Actual timing and outcomes of the psoriasis-age expansion and atopic dermatitis and foam regulatory filings, reviews and launches.
- Cash use and runway relative to management’s 12-month estimate, including the availability and conditions of any additional financing.
- Exposure to floating-rate debt, loan fees, collateral and covenants, including the threshold details not clearly stated in this filing.
- Potential future payments under the Ducentis acquisition and product-license agreements, and the effect of supply commitments and reliance on third-party manufacturers.