ARQT - Arcutis Biotherapeutics: High OpEx And Crowded Markets Cloud Prospects

2023-07-12 12:49:58 ET

Summary

• Arcutis Biotherapeutics' FDA-approved product, Zoryve, targets plaque psoriasis and is being developed for other dermatological diseases. The company's Q1 2023 revenues were $2.8 million, with a net loss of $80.1 million.
• The company faces intense competition in the dermatological treatment market, particularly for seborrheic dermatitis and scalp and body psoriasis. Its success will depend on regulatory approvals and market acceptance.
• Despite promising clinical results, the company's high operating expenses and challenging market conditions present substantial risks.

Introduction

Arcutis Biotherapeutics ( ARQT ) is an early commercial-stage biopharmaceutical company developing and commercializing treatments for dermatological diseases. Their FDA-approved product, Zoryve (roflumilast) cream, targets plaque psoriasis. Additional indications are being pursued including atopic dermatitis and seborrheic dermatitis. Beyond Zoryve, they're also developing ARQ-255 and ARQ-252, JAK1 inhibitors designed to treat alopecia areata, hand eczema, vitiligo, and more. Furthermore, the acquisition of Ducentis BioTherapeutics expanded their portfolio with ARQ-234, a fusion protein being developed to treat atopic dermatitis and other inflammatory conditions.

Recent developments: Arcutis Biotherapeutics' stock rose 15% in early June after prescription data showed a 40% increase in Q1 for their psoriasis cream, Zoryve.

Q1 2023 Earnings

For Q1 2023, Arcutis Biotherapeutics reported net product revenues of $2.8 million from Zoryve sales, offset by higher costs including co-pay assistance. The cost of sales was $0.8 million. R&D expenses dropped to $35.3 million due to decreased clinical development costs, while SG&A expenses rose to $42.9 million due to increased headcount and sales/marketing expenses. The company incurred a net loss of $80.1 million or $1.31 per share. Cash and equivalents were at $333.3 million, down from $410.8 million, with net cash used in operating activities amounting to $80.3 million.

Zoryve - Plaque Psoriasis

Zoryve , a topical phosphodiesterase 4 inhibitor, was approved by the FDA in 2022 for treating plaque psoriasis in people aged 12 and above. In a phase 2 trial, patients using Zoryve 0.3% and 0.15% cream showed significant improvements compared to the placebo group, with minimal adverse effects.

The treatment landscape for psoriasis is complex, with various therapies including topicals, phototherapy, and systemic treatments. Topical treatments are typically first-line for mild-to-moderate cases, while phototherapy and systemic drugs are often used for moderate-to-severe cases. Zoryve offers an additional option within the topical treatments category. As a phosphodiesterase 4 inhibitor, it targets inflammation in a unique way compared to other topicals like corticosteroids, thus offering an alternative for patients who don't respond well to or can't use traditional topicals. Furthermore, its efficacy in treating plaque psoriasis, including in difficult-to-treat areas, increases its potential value in the treatment landscape.

Zoryve - Dermatitis & Psoriasis < Aged 2 Years

Zoryve's market potential for treating seborrheic dermatitis and scalp and body psoriasis is considerable, but also deeply competitive.

Seborrheic dermatitis , affecting millions globally, has several established treatments like antifungal and corticosteroid topicals. The proposed Zoryve formulation will enter a competitive market, and its success will depend on showing significant advantages in efficacy and safety.

Similarly, with over 125 million individuals affected by psoriasis globally , a novel treatment like Zoryve foam could offer a new solution, especially for scalp psoriasis. Nevertheless, the market is already crowded with various treatments, including topicals, biologics, and systemic therapies. It will be crucial for roflumilast to demonstrate distinct benefits.

Given this context, while Zoryve could fill a niche within these treatment landscapes, it faces rigorous competition. Its ultimate success relies on regulatory approvals, distinct advantages over existing therapies, and market acceptance.

My Analysis & Recommendation

In summing up, Arcutis Biotherapeutics has carved a space for itself in the dermatological treatment market with its FDA-approved product, Zoryve (roflumilast). This cream, used for treating plaque psoriasis, has shown encouraging growth. However, the prospects of Zoryve for seborrheic dermatitis and scalp and body psoriasis must contend with intense competition.

As an investor, it's critical to pay attention to the company's financial state. Despite the Q1 2023 revenues of $2.8 million, the company posted a significant net loss of $80.1 million, mainly attributed to R&D and SG&A expenses. This suggests Arcutis is currently heavily investing in research and marketing, potentially indicating financial risk in the short-term.

In terms of peak annual revenue, the intense competition in the therapeutic areas Arcutis is targeting makes it challenging to predict. Success in the crowded markets of their target indications could potentially generate substantial revenues, but the company faces a steep uphill climb.

With a market cap of $571 million, and considering current revenues against the backdrop of the potential future revenues, the stock seems to face considerable risks. The high short interest of 27% could be reflective of the market's anticipation of regulatory hurdles or intense competition outpacing Arcutis' offerings.

Therefore, from an investment standpoint, I have a "sell" rating assigned to Arcutis Biotherapeutics stock. The company's high operating expenses and the challenging, crowded market it operates in both current and potential indications present substantial risks. Despite promising clinical results, the financials indicate a challenging road to profitability. While their offerings outside of Zoryve may prove fruitful in the years to come, they are all preclinical/phase 1 assets and, therefore, difficult to assign value to at this time. Consequently, unless the company can significantly reduce operating expenses or rapidly increase revenues, its financial sustainability remains uncertain.

Risks to Thesis

When the facts change, I change my mind.

There are a few risks that could undermine my "Sell" recommendation. Below are the three primary risks.

1. Clinical Success: One of the primary risks to my "Sell" recommendation is the potential clinical success of Arcutis Biotherapeutics' pipeline. If their pipeline drugs demonstrate outstanding efficacy and safety profiles, they could carve out a substantial market share, even in the crowded dermatological treatment landscape. Success in clinical trials could also position the company as a potential acquisition target, offering an unexpected upside.

2. Market Growth: Another risk is the potential for higher-than-expected market growth in the company's targeted indications. The dermatological diseases market is substantial and still growing due to factors like increasing prevalence of skin disorders and rising awareness about treatment options. If this growth outpaces expectations, it could provide a larger-than-anticipated customer base for Arcutis' products, bolstering their revenues.

3. Regulatory Success and Speed: Finally, swift regulatory success presents a third risk to my recommendation. If Arcutis receives rapid FDA approval for its treatments for seborrheic dermatitis, scalp and body psoriasis, or other indications, it could beat competitors to market and capture significant market share. This could lead to higher-than-expected revenue growth and might alter the financial outlook of the company.

For further details see: