ROIV - Arcutis: Zoryve - A Challenging Launch With Progress

2023-07-28 05:31:08 ET

Summary

• Arcutis has launched Zoryve, a topical cream for the treatment of psoriasis, and is focused on transitioning to a commercial-stage company.
• The company has made progress with major pharmacy benefit managers and positioned Zoryve to be highly accessible and priced as a high-volume product.
• Arcutis is also exploring additional indications for Zoryve in seborrheic dermatitis and atopic dermatitis, which could increase its market volume significantly.

Summary

Arcutis (ARQT) recently launched Zoryve for the treatment of psoriasis. Investors are focused on the company's transition to a commercial stage company. While the company has experienced some initial difficulties with the launch, it appears they have made considerable progress with the three major PBMs. Arcutis has positioning the product to be highly accessible to patients and has priced it to be a high volume product. Longer term, data supports the potential for additional volume given the potential for additional indications in both seborrheic dermatitis and atopic dermatitis.

Zoryve for the treatment of Psoriasis

Zoryve is a topical cream that is a potent and selective phosphodiesterase-4 (PDE4) inhibitor. Currently, it is only FDA approved for the treatment of psoriasis. The cream is used once daily, can be applied to most areas of skin, and can be safely used chronically. The label describes a favorable side effect profile with diarrhea (3.1%) and headache (2.4%) being the most commonly reported side effects.

The first line standard of care treatment for psoriasis is a topical steroid which can be effective for mild cases. However, high-potency steroids should not be used on the face or intertriginous areas (where skin touches or rubs together) resulting in a complicated regimen where a physician needs to write multiple prescriptions and explain which to use where. In addition, high potency steroids should not be used chronically as patients can experience skin thinning, stretch marks, telangiectasia (spider veins) and hypopigmentation with prolonged use. An acne like rash can develop when steroids are withdrawn in some cases after prolonged use. Lastly, potent topical steroids can cause Cushing syndrome which is a rare but serious adverse event.

Despite the considerable drawbacks, topical steroids are routinely prescribed for psoriasis because they are very inexpensive and widely available. There are 9 million US patients with psoriasis and 90% are currently treated with topical drugs such as steroid creams. Arcutis' strategy is to attempt to market Zoryve as an alternative to be used in early line settings as it has demonstrated that it is highly effective with a better overall safety profile. Zoryve is priced at $825 per tube before discounts which is considerably more expensive than a generic steroid. The pricing is less than two recently launched topicals, Vtama which has a $1,325 per tube list price and Opzelura which tops that at $1950 per tube.

The Launch

Zoryve was approved in August of 2022. Arcutis reported $3.0 M in 4Q sales and $2.8 M in sales in Q123. Last quarter the company experienced administrative problems with how prescriptions were being processed. On the earnings call , the CCO described pharmacies processing prescriptions incorrectly and confusing which plans were covering the drug. In addition there were issues with educating physicians about including diagnosis codes identifying the patient as having psoriasis and/or information about patients having failed a prior therapy which is required in some cases to activate eligibility for coverage. Arcutis has hired additional staff to help educate physicians and pharmacists on these administrative tasks so that prescriptions are processed correctly.

At present, the company has succeeded in obtaining formulary status with the three major pharmacy benefit managers (CVS/ Caremark, Express Scripts and OptumRx) who manage prescription drugs. 131 million commercially insured patients, representing 80% of covered lives in the United States now have access to Zoryve. Achieving this within 12 months of launch is an impressive accomplishment.

Formulary positioning is largely without prior authorization. Payers are allowing a relatively smooth and simple process for patients to access medication. In most cases, physicians simply write a prescription and patients should be able to obtain it within the copay/coinsurance structure of their plan.

Investors should expect further clarity on step edits and payer's requirements for first line use during the upcoming earnings call. Caremark (CVS) appears to have the most favorable positioning for Zoyvre. Patients need only to "step edit" through a topical steroid and/or have their physician document that their psoriasis occurs in areas of the body where steroids are not appropriate. The other two PBMs appear slightly more restrictive and require prior use of either a topical steroids and vitamin D analog cream or having used a topical steroid and disease in intertriginous areas.

New Indications to Increase Volume

Seborrheic Dermatitis

Arcutis recently submitted the NDA for roflumilast foam in seborrheic dermatitis. This condition causes itchy red patches and greasy, flaking scales and includes "cradle cap" that infants experience. It frequently occurs in thin skinned areas often near the nose, eyes and scalp. It can also occur in or behind the ear, chest, armpit and groin. Patients report persistent itch. Steroids and anti-fungals are used and salicylic acid or coal tar can also be used to remove scale.

Roflumilast foam is a unique product in that it is a non greasy, water based foam which is designed for hair bearing areas. Doctors have few effective choices in this indication and there is considerable unmet need for better treatments. There have been no new products brought to market in a decade and the approved products are formulations which are more difficult to use than a foam. The availability of a foam formulation is a key differentiator given it is easy to apply to the scalp and other affected areas.

The FDA is expected to make a decision on the additional indication of seborrheic dermatitis by December 16. There are as many patients with seborrheic dermatitis as psoriasis so adding this indication doubles the market opportunity.

Atopic Dermatitis

Based on the INTEGUMENT-1 and INTEGUMENT-2 pivotal studies which met their primary endpoints, a filing to FDA for the additional indication of atopic dermatitis is expected in 2H of 2023.

A particularly attractive subset of the market is the pediatric population. Many parents and pediatricians are wary of using steroids on children. Arcutis has an ongoing study to explore efficacy and safety in children as young as 2. Assuming the INTEGUMENT-PED study meets the primary endpoint, the safety may make this a product pediatricians are very comfortable prescribing as an alternative to a steroid.

Market research suggests there are 90K weekly prescriptions for topicals in psoriasis and 300K written in atopic dermatitis. For Arcutis, when/if this additional indication is added, the market opportunity expands significantly.

Arcutis is looking for a commercial partner to co-market during the atopic dermatitis launch who will call on primary care physicians and pediatricians. Approximately 60% of the prescriptions in atopic dermatitis are written by these practitioners. Given the goal of high volume, promotion to a wider audience is aligned with the strategy.

Finances

ARQT ended Q1 with $333 M. They are engaged in a costly commercial launch and burning $80 m a quarter. It is likely they will need to raise additional capital soon.

Conclusions

In some ways, Arcutis is testing a differentiated model that is rarely used in the pharmaceutical business-pricing at a reasonable price point for payers and hoping to achieve volume. However, a key risk with this business strategy is that the low pricing becomes a liability if the company fails to generate significant volume.

Elidel , pimecrolimus, a non-steroidal topical cream was launched in 2002 for atopic dermatitis. Elidel (now generically available) is a topical cream that is an alternative to a steroid cream. It was a true commercial success with over 5 million patients including children using the drug after launch.

Then came the black box warning for a potential risk for cancer which many physicians believed was theoretical more than evidence based given the dose associated with cancer was significantly higher than the maximum human dose in the prescribing information.

Before the black box warning, in 2004 Elidel sales were $349 million. By 2011, the rights for Elidel were sold for $420 million. The key take away for investors in 2023 may be that physicians may embrace a non steroidal topical which is safe for the routine dermatological issues they see so frequently in practice.

Longer term, roflumilast may be a commercial success but the launch has been slow and costly. Even with optimism for the longer term, the popular mantra "short the launch" seems to have played out here. Launches require investor patience and smaller companies especially, often have a learning curve as they transition to a commercial stage company. Profitability from Arcutis is many quarters away and they likely need one more capital raise.

After last quarter when sales disappointed, most analysts reduced their price targets. Price targets now range from $33 at Goldman Sachs to $65 at Cowen. While it does appear Arcutis experienced some initial difficulties, the company seems to be on a better path now. Needham reported that prescriptions are about 40% higher compared to Q1. In my view, investors should expect less than $5 m in sales this quarter. But, longer term, the expectation is for continued growth as the impact of formulary inclusion and additional indications will gradually begin to be reflected in sales figures.

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