Arcutis Biotherapeutics, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in U.S. dollars. The company is an early commercial-stage biopharmaceutical business focused on dermatology.
Business context and key developments
- FDA approved ZORYVE (roflumilast) cream 0.3% for plaque psoriasis in July 2022; U.S. commercialization began in August.
- Arcutis acquired Ducentis in September, adding ARQ-234, a CD200R agonist candidate intended for atopic dermatitis.
- Portfolio development includes roflumilast cream and foam programs, topical JAK inhibitor candidates ARQ-252 and ARQ-255, and ARQ-234.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $0.7m | — | $0.7m | — |
| Cost of sales | $0.3m | — | $0.3m | — |
| Research and development | $69.7m | $40.6m | $148.6m | $93.0m |
| Selling, general and administrative | $35.5m | $16.5m | $85.1m | $42.2m |
| Operating loss | $(104.7)m | $(57.1)m | $(233.2)m | $(135.2)m |
| Net loss | $(107.7)m | $(57.0)m | $(239.4)m | $(135.0)m |
| Net loss per share, basic and diluted | $(1.89) | $(1.14) | $(4.52) | $(2.75) |
| Cash used in operating activities | — | — | $(186.7)m | $(122.9)m |
- Q3 gross profit was approximately $0.5m, or a 63% gross margin, based on reported revenue less cost of sales. The company noted that much pre-approval manufacturing cost had already been expensed, which affects early-period cost of sales.
- Q3 R&D increased 72% year over year, including a $29.6m acquired in-process R&D charge for Ducentis. Q3 SG&A rose 115%, primarily with commercialization hiring and sales and marketing spending.
- For the first nine months, investing cash outflow was $129.4m and financing cash inflow was $300.8m. Cash, cash equivalents and restricted cash declined $15.2m to $82.8m; marketable securities were $395.4m at period end.
Liquidity, debt and capital
- Cash, cash equivalents, restricted cash and marketable securities totaled $478.2m at September 30, 2022; excluding restricted cash, cash and marketable securities were approximately $477.0m.
- Management said existing capital resources were expected to fund projected operating requirements for at least 12 months from issuance of the financial statements. It expects operating losses and significant expenses to continue; additional financing may be needed.
- Debt principal outstanding was $200.0m; carrying value, net of issuance costs and fees, was $196.8m. The floating interest rate was 10.08% at quarter-end, with maturity on January 1, 2027. The debt is secured by substantially all assets, including intellectual property. An additional $25.0m tranche is conditional.
- Financing included $125.0m drawn under the loan facility and $161.6m net proceeds from an August stock offering. Shares outstanding increased from 50.3m at year-end 2021 to 60.9m at September 30, 2022.
Outlook, risks and contingencies
- Management expected topline results from the INTEGUMENT-1 and -2 atopic dermatitis trials by year-end 2022, with an sNDA planned in 2023 subject to results. INTEGUMENT-PED topline data were expected in 2023; the timeline reflected enrollment challenges and likely minor COVID-19 effects.
- Management expected a roflumilast foam NDA submission for seborrheic dermatitis in Q1 2023, based on positive topline results, and an sNDA for scalp and body psoriasis after potential foam approval for seborrheic dermatitis. The filing also described plans to initiate an ARQ-255 alopecia areata trial in 2022.
- Risks include uncertain product uptake and reimbursement, continued high development and commercialization spending, reliance on third-party and potentially single-source manufacturers, clinical and regulatory uncertainty, and potential need for further financing. The company identified the Inflation Reduction Act and other drug-pricing measures as possible adverse factors.
- Ducentis consideration includes contingent development, regulatory and commercial milestones estimated by the company at up to approximately $400m; none were considered probable or accrued at quarter-end. AstraZeneca royalties and further regulatory and sales milestones may apply to ZORYVE; manufacturing contracts include minimum purchase commitments.
- No material litigation was reported. The company said it was in compliance with loan covenants at September 30, 2022 and reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether ZORYVE demand, net revenue and payer access improve beyond the initial launch period, and how sales deductions and channel inventory affect reported revenue.
- Whether the stated clinical and regulatory timelines are met, particularly atopic dermatitis trial results and planned roflumilast foam submissions.
- Cash-burn trajectory and runway against management’s 12-month liquidity estimate, including the timing and availability conditions for remaining debt funding.
- Debt servicing exposure at variable rates, collateral and covenant requirements, and potential fees or contingent milestone payments.
- Potential dilution from future equity financing and outstanding equity awards; acquisition-related milestone obligations and commercial royalties.