ARQT - Arcutis Biotherapeutics: Almost There But Needs Some Fine-Tuning

2023-11-13 07:47:46 ET

Summary

• Arcutis faces competition from Otezla and Vtama in the treatment of plaque psoriasis.
• Topical therapies for psoriasis have limitations and biologics are expensive, limiting their use.
• Zoryve, Arcutis' approved drug, has seen positive prescription growth and label expansion for children, but sales figures have been lower than expected.

I covered Arcutis ( ARQT ) a long time ago, long before the approval of ARQ-151 (active ingredient Roflumilast) for Plaque Psoriasis. This was in October 2020, and I noted there the differential safety profile of the company's version of Roflumilast versus other drugs and other previously approved versions of Roflumilast.

The main competitor for the drug is Otezla, which accounted for over $2bn in sales in 2019 for all approved indications. Zoryve also competes with Vtama (tapinarof), owned by Roivant Sciences ( ROIV ) unit Dermavant Sciences.

For topical therapies, I noted the following:

Topical therapies are the treatments of choice for the vast majority of psoriasis patients; no new topical therapy has been approved in over 20 years. However, according to the company, these topical therapies suffer from a number of shortcomings - some topical steroids produce HPA axis suppression, skin atrophy (thinning), striae (stretch marks), and telangiectasia (spider veins), as well as some irreversible side effects. Therefore, these are not used for chronic disease, or for sensitive areas of the body. Other therapies, like vitamin D3 analogs, can be used chronically, but are less efficacious. The above two therapies, combined, still carry a risk, and therefore cannot be recommended for long term use.

For biologics, the costs are high, and their use is strictly restricted in the US. I quoted from the company, which said that the "uptake of biologics has remained limited due to multiple factors, including the fact that they are indicated only for use in moderate to severe patients, their high cost, which can be as much as $60,000 per year, consequent reimbursement and access restrictions, frequent high patient co-pays, perceived risk of side effects, and patient fear of injection."

Of the vast $22.7bn projected market for plaque psoriasis, biologics represented 83% of all worldwide sales and 85% of US sales in dollar terms, although they represented a mere 6% of all psoriasis patients in terms of numbers of patients treated. This was because of their relatively high cost.

I concluded my article by saying while I like ARQT, I consider it risky. The stock, despite an approval, is down 85% since that time, so it seems my reluctance was justified. However, the price at the time was around $18, and the highest price point it reached, it seems, was around $25. So that was a 50% gain, however, the stock has been downhill ever since late last year.

Last July, the molecule was approved as ??Zoryve and that was the peak for the stock. In the months leading up to the approval, the molecule scored a number of points in trials for dermatitis of various types, and for various localized psoriasis. However, two issues occurred during this period. One, a second molecule, ARQ-252, was shelved after producing not-so-promising data in vitiligo; and two, BMS got its own drug called Sotyktu approved for moderate-to-severe plaque psoriasis, the same indication where ??Zoryve was approved, as well. Meanwhile, ARQT launched Zoryve in the market in August, and in November, it was added to the Express Scripts national formularies.

Just last month, Zoryve was granted a label expansion for children aged 6 to 11 years; its previous label had been for people 12 years or older. The drug saw steady prescription growth since approval, and in June, the numbers disclosed were very positive.

There were other favorable movements as well. Late last year, a second pivotal Phase 3 trial for atopic dermatitis ((AD)) attained its primary endpoint. This was the INTEGUMENT-2 trial, a double-blind, vehicle-controlled trial in 683 patients aged six years and older with mild to moderate AD who received ro?umilast cream 0.15% or vehicle once daily for four weeks. Data showed that ~29% of patients who received ro?umilast achieved Investigator Global Assessment ((IGA)) Success, a clinical measure of the disease, compared to 12.0% in the vehicle group (P<0.0001). Other key details :

INTEGUMENT-2 also achieved key secondary endpoints, including ~42% of patients in the ro?umilast arm reaching a 75% improvement of Eczema Area and Severity Index (EASI-75) at week four compared to ~20% of patients treated with the vehicle (P<0.0001).

In terms of safety, the drug was well tolerated leading to a low incidence of treatment emergent adverse events (TRAEs) which were mostly mild to moderate severity.

While more than 90% in the ro?umilast arm completed the full four weeks of the therapy, there were ~2% and ~1% discontinuations due to adverse events in the roflumilast cream and vehicle groups, respectively.

Another major positive was the FDA's acceptance of the NDA for roflumilast foam 0.3% to treat seborrheic dermatitis in patients nine years of age and older. PDUFA date is December 16. The NDA was backed by data from phase 2 trials and a phase 3 study called STRATUM.

However, of the things that are dragging the stock down, one is the less-than-expected sales figure of Zorvye, possibly due to the differentiated competitive space, and the other is the loan agreement with SLR Capital Partners. In Q1, revenue of $2.8mn was below analyst expectations of $3.1mn.

As to the loan agreement, as an analyst from Jones Research noted :

We believe the near-term risk of technical default remains elevated based on our sales expectations for Zoryve and roflumilast foam, and existing shareholders may experience further dilution given the company will most likely require significant additional capital on its path to break-even," Jones wrote in its note.

The company was recently able to raise $100mn after positive data, which begs the question: did they really need to go and entangle themselves in a toxic - or at least tough - loan last year. The answer, I think, is probably not, although given their somewhat desperate cash position, I cannot exactly blame them.

Financials

ARQT has a market cap of $180mn and a cash balance of $228mn. For the third quarter, they reported net product revenue of $8.1 million and total revenue of $38mn. R&D expenses were $26.2 million, while G&A expenses were a huge $48mn, so huge, in fact, that the company does not mention it in their earnings call. At this rate, they have a cash balance of just around 3 more quarters, so maybe they do need a toxic loan.

62% of the company is held by institutions, led by Suvretta, Prudential, and FMR LLC. Insiders have regularly sold stock.

Risks

The company has a very high overhead and needs to drastically reduce this. Moreover, while their drug approval is a solid start, they need to expand labels and get into other indications as well, because the approved indications are highly differentiated.

Bottom Line

I like ARQT at one level, but a granular look tells me there are problems with this company that need to be addressed first, before I get really interested.

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