Arcutis Biotherapeutics, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Arcutis is a late-stage biopharmaceutical company focused on topical treatments for immune-mediated dermatological diseases. The filing covers the fiscal year ended December 31, 2019. The company had no products approved for commercial sale and generated no product revenue.
- Lead candidate: ARQ-151, topical roflumilast cream for plaque psoriasis and atopic dermatitis.
- Other candidates: ARQ-154 foam for scalp psoriasis and seborrheic dermatitis; ARQ-252 topical JAK1 inhibitor for hand eczema and vitiligo; and ARQ-255, a preclinical formulation for alopecia areata.
- ARQ-151 was in Phase 3 psoriasis trials, with topline data expected in the first half of 2021. ARQ-154 Phase 2 studies were ongoing, and the company planned additional ARQ-252 studies in 2020.
- The company operated as one reportable segment and had 29 full-time employees at December 31, 2019.
Financial Performance, Cash Flow, Liquidity and Capitalization
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No product revenue |
| Research and development expense | $36.5 million | $17.9 million | Up 104% |
| General and administrative expense | $6.6 million | $1.8 million | Up 268% |
| Total operating expenses | $43.1 million | $19.7 million | Up 119% |
| Loss from operations | $(43.1) million | $(19.7) million | Higher loss |
| Other income, net | $1.1 million | $0.5 million | Up 137% |
| Net loss | $(42.0) million | $(19.3) million | Loss increased $22.7 million |
| Basic and diluted net loss per share | $(22.78) | $(15.53) | More shares and higher loss |
| Cash used in operating activities | $(42.8) million | $(14.1) million | Higher cash burn |
| Cash used in investing activities | $(26.3) million | $(11.5) million | Primarily marketable securities |
| Cash provided by financing activities | $93.1 million | $61.6 million | Primarily preferred stock financing |
- Cash, cash equivalents and marketable securities totaled $101.3 million at December 31, 2019, compared with $50.9 million at December 31, 2018.
- Cash and cash equivalents were $63.3 million and marketable securities were $37.9 million. The company had no debt outstanding.
- Working capital was $101.2 million, total assets were $107.0 million and the accumulated deficit was $66.3 million.
- Convertible preferred stock had a carrying value of $166.5 million and a liquidation preference of $166.3 million at year-end.
- The company received approximately $183.3 million of gross IPO proceeds in January 2020, after the fiscal year-end, from the sale of 10,781,250 shares at $17.00 per share. Outstanding preferred stock converted into 24,385,388 common shares upon the IPO.
Material Changes Versus the Prior Comparable Period
- Research and development expense increased $18.6 million, primarily from higher clinical trial costs, increased personnel costs and manufacturing activity as ARQ-151 programs advanced.
- General and administrative expense increased $4.8 million due primarily to higher professional services and personnel-related costs.
- Clinical and preclinical costs increased $14.6 million, while manufacturing costs increased $1.0 million.
- Product milestone expense decreased $0.9 million to $3.5 million. The 2019 amount included a $2.0 million milestone payment to AstraZeneca following positive Phase 2 ARQ-151 data and a $1.5 million payment to Hengrui upon exercise of the ARQ-252 option.
- Operating cash burn increased substantially as the company initiated and expanded clinical programs.
- The company entered into or expanded strategic licensing arrangements: it exercised its exclusive Hengrui option in December 2019 and expanded the territory to include Canada.
- The company adopted new lease accounting guidance in 2019 and recognized operating lease assets and liabilities for its Westlake Village headquarters.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected continued operating losses and increasing research, development, regulatory and commercialization expenses for the foreseeable future.
- Based on planned operations and including the post-year-end IPO proceeds, management expected available liquidity to fund operations through 2021, but stated that substantial additional capital would ultimately be required.
- The company had no internal manufacturing or commercial sales infrastructure and relied on third-party, in some cases single-source, manufacturers and contract research organizations.
- COVID-19 was identified as a material uncertainty that could delay, halt or require modification of clinical trials and other operations. As of March 19, 2020, operations had not been significantly impacted, but the ultimate effect was unclear.
- ARQ-151’s Phase 2 atopic dermatitis study did not achieve statistical significance on its primary endpoint or the anticipated registrational IGA Success endpoint, although certain secondary endpoints showed improvement.
- Clinical results remain subject to the risks of unsuccessful trials, enrollment delays, safety findings, regulatory disagreement, manufacturing problems and changing clinical data.
- Future obligations under the AstraZeneca and Hengrui agreements include regulatory, development and sales milestones of up to $12.5 million and $15.0 million for AstraZeneca, and up to $20.5 million and $200.0 million for Hengrui, respectively, plus royalties. Timing and likelihood of these payments were not determinable.
- The company reported no material litigation and no off-balance-sheet arrangements.
- Patent protection for ARQ-151 and ARQ-154 was primarily based on formulation and method-of-use claims because the licensed composition-of-matter patent for roflumilast expired in January 2020. Certain formulation patents were projected to expire no earlier than 2037, subject to potential extensions.
Most Important Facts for Investors to Verify
- Whether ARQ-151 Phase 3 psoriasis trials achieved their primary endpoints and supported an NDA submission.
- The status, final results and regulatory implications of the ARQ-151 long-term safety and atopic dermatitis programs.
- Clinical progress and financing requirements for ARQ-154, ARQ-252 and ARQ-255.
- Actual cash burn, remaining liquidity and the timing and terms of any future equity, debt or partnership financing.
- Potential milestone, royalty and sublicensing obligations under the AstraZeneca and Hengrui agreements.
- The impact of COVID-19 or other operational disruptions on enrollment, trial timelines, manufacturing and regulatory submissions.
- The strength, enforceability and duration of formulation, method-of-use and licensed patent protection.
- Whether commercial manufacturing, reimbursement, market adoption and a dermatology-focused sales infrastructure can be established if a product is approved.