What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 64 added, 63 removed, 240 unchanged (35% of the section changed)

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As a result of many factors, including those factors identified below and those set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results and the timing of selected events could differ materially from the forward-looking statements contained in the following discussion and analysis.

We are a late-stage biopharmaceutical company focused on developing meaningful innovations to address the urgent needs of patients living with immune-mediated dermatological diseases and conditions, or immuno-dermatology.

We are a late-stage biopharmaceutical company focused on developing meaningful innovations in immuno-dermatology to address the urgent needs of patients living with immune-mediated dermatological diseases and conditions.

Our current portfolio is comprised of highly differentiated topical treatments with significant potential to treat immune-mediated dermatological diseases and conditions.

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We believe this strategy uniquely positions us to rapidly progress towards our goal of bridging the treatment innovation gap in dermatology, while maximizing our probability of technical success and financial resources.

Our lead product candidate, roflumilast cream, has successfully completed pivotal Phase 3 clinical trials in plaque psoriasis.

We are currently preparing a New Drug Application (NDA), with a submission to the FDA expected late in the third quarter or early in the fourth quarter of 2021.

Roflumilast cream is a highly potent and selective phosphodiesterase type 4 (PDE4) inhibitor, an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for dermatological conditions.

In September 2021, we submitted a New Drug Application (NDA) to the FDA for our lead product candidate, roflumilast cream, for the treatment of mild-to-severe plaque psoriasis.

Roflumilast cream is a once-daily topical formulation of roflumilast, a highly potent and selective phosphodiesterase-4 (PDE4) inhibitor.

PDE4 is an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for dermatological conditions.

We are developing roflumilast cream for the treatment of plaque psoriasis, including psoriasis in intertriginous regions such as the groin, axillae, and inframammary areas, as well as atopic dermatitis.

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Additionally, we have completed a Phase 2 proof of concept study of roflumilast cream in atopic dermatitis, and enrollment is underway in pivotal Phase 3 clinical trials, with topline data expected in the second half of 2022.

We are also developing a topical foam formulation of roflumilast, and have successfully completed Phase 2 studies in both seborrheic dermatitis and scalp psoriasis.

In seborrheic dermatitis, we have initiated a single pivotal Phase 3 clinical trial, with topline data expected in the second or third quarter of 2022.

If successful, we believe this study will be sufficient basis to file an NDA, based on our discussions with the FDA.

In scalp psoriasis, we also had a successful End of Phase 2 meeting with the FDA and plan to initiate a single pivotal Phase 3 clinical trial in the third quarter of 2021, with topline data expected in the second half of 2022.

We are also developing a topical foam formulation of roflumilast, and have successfully completed Phase 2 studies in both seborrheic dermatitis and scalp and body psoriasis.

Enrollment is underway in single pivotal Phase 3 clinical trials in each of the seborrheic dermatitis and scalp and body psoriasis indications.

Topline data is expected in the second or third quarter of 2022 for seborrheic dermatitis and the second half of 2022 for scalp and body psoriasis.

If successful, we believe these studies will be sufficient bases to file for regulatory approval, based on our discussions with the FDA.

We are developing ARQ-252, a potent and highly selective topical JAK1 inhibitor, for the treatment of chronic hand eczema and vitiligo.

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Importantly, there were no safety or tolerability issues seen in that study.

Based on these findings, we also recently terminated our Phase 2 proof of concept study evaluating ARQ-252 as a potential treatment for vitiligo.

Based on these findings, we also terminated our Phase 2 proof of concept study evaluating ARQ-252 as a potential treatment for vitiligo.

We are currently working on re-formulating ARQ-252 to develop an enhanced formulation that delivers more active drug to targets in the skin.

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See Note 1 to the unaudited condensed financial statements for additional information.

We have incurred net losses in each year since inception, including net losses of $42.0 million and $78.1 million for the three and six months ended June 30, 2021, respectively, and $35.4 million and $63.4 million for the three and six months ended June 30, 2020, respectively.

As of June 30, 2021, we had an accumulated deficit of $280.0 million and cash, cash equivalents, restricted cash, and marketable securities of $410.9 million.

We have incurred net losses in each year since inception, including net losses of $57.0 million and $135.0 million for the three and nine months ended September 30, 2021, respectively, and $38.2 million and $101.6 million for the three and nine months ended September 30, 2020, respectively.

As of September 30, 2021, we had an accumulated deficit of $337.0 million and cash, cash equivalents, restricted cash, and marketable securities of $368.8 million.

We expect to continue to incur losses for the foreseeable future and expect to incur increased expenses as we advance our product candidates through clinical trials and regulatory submissions.

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We expect to continue to incur substantial research and development expenses in the future as we develop our product candidates.

In particular, we expect to incur substantial research and development expenses for the Phase 3 trials of roflumilast cream for atopic dermatitis, the Phase 3 trials of roflumilast foam for seborrheic dermatitis and scalp psoriasis, ARQ-252 for hand eczema and vitiligo, and ARQ-255 for alopecia areata.

In particular, we expect to incur substantial research and development expenses for the Phase 3 trials of roflumilast cream for atopic dermatitis, the Phase 3 trials of roflumilast foam for seborrheic dermatitis and scalp and body psoriasis, ARQ-252 for chronic hand eczema and vitiligo, and ARQ-255 for alopecia areata.

We have entered, and may continue to enter, into license agreements to access and utilize certain molecules for the treatment of dermatological diseases and disorders.

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Results of Operations

Comparison of the Three Months Ended June 30, 2021 and 2020

Comparison of the Three Months Ended September 30, 2021 and 2020

The following table sets forth our results of operations for the periods indicated:

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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Other income, net 98 99 (1) (1) %

72 215 (143) (67) %

Net loss $ (56,980) $ (38,204) $ (18,776) 49 %

Research and Development Expenses

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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Total research and development expense $ 40,604 $ 32,743 $ 7,861 24 %

Research and development expenses increased by $0.8 million, or 3%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was due to an increase in direct costs related to the topical JAK inhibitor program (ARQ-252 and ARQ-255) of $1.7 million, coupled with an increase in compensation and personnel-related costs of $3.2 million, and an increase in other costs of $2.2 million.

This increase was offset by a decrease in direct costs related to the topical roflumilast program of $6.4 million.

The increased topical JAK inhibitor program costs relate primarily to our Phase 2 study of ARQ-252 in vitiligo.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount.

The increase in other costs relate primarily to an increase in consulting activity and medical affairs spending.

The decreased topical roflumilast program costs relate primarily to completion of our Phase 3 studies of roflumilast cream in plaque psoriasis and Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis, partially offset by the costs related to our ongoing Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis.

Research and development expenses increased by $7.9 million, or 24%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The increase was primarily due to an increase in compensation and personnel-related costs of $4.8 million, an increase in other costs of $3.6 million, and an increase in direct costs related to the topical roflumilast program of $2.6 million.

These increases were partially offset by a decrease in direct costs related to the topical JAK inhibitor program (ARQ-252 and ARQ-255) of $3.2 million.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount to manage our growing clinical programs.

The increase in other costs was primarily due to an increase in consulting activity and medical affairs spending.

The increase in topical roflumilast program costs was primarily due to increased manufacturing costs offset by a slight decrease in clinical trial costs.

Clinical trial costs declined due to the completion of Phase 3 studies of roflumilast cream in plaque psoriasis, partially offset by the initiation of Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis.

The decrease in topical JAK inhibitor program costs was primarily due to the completion of our Phase 2 study of ARQ-252 in chronic hand eczema.

General and Administrative Expenses

General and administrative expenses increased by $5.7 million, or 101%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

General and administrative expenses increased by $10.9 million, or 196%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The increase was primarily due to an increase in compensation and personnel-related expenses of $6.9 million, and an increase in professional services of $3.1 million.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount.

The increase in professional services was mainly due to an increase in consulting activity and marketing expenses primarily related to roflumilast.

The increase in professional services was due to an increase in consulting activity and marketing expenses primarily related to roflumilast.

Other Income, Net

Other income, net decreased by $143,000, or 67%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The decrease was due to a lower yield on our investment portfolio.

Comparison of the Six Months Ended June 30, 2021 and 2020

Other income, net decreased by $1,000, or 1%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Comparison of the Nine Months Ended September 30, 2021 and 2020

The following table sets forth our results of operations for the periods indicated:

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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Other income, net 213 952 (739) (78) %

115 853 (738) (87) %

Net loss $ (135,030) $ (101,629) $ (33,401) 33 %

Research and Development Expenses

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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Total research and development expense $ 93,000 $ 87,934 $ 5,066 6 %

Research and development expenses decreased by $2.8 million, or 5%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The decrease was due to a decrease in direct costs related to the topical roflumilast program of $17.2 million.

This decrease was offset by an increase in direct costs related to the topical JAK inhibitor program (ARQ-252 and ARQ-255) of $3.9 million, an increase in compensation and personnel-related costs of $6.1 million, and an increase of $4.2 million in other costs.

The decreased topical roflumilast program costs relate primarily to the completion of the Phase 3 studies of roflumilast cream for plaque psoriasis and the Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis.

This decrease was partially offset by the costs related to our Phase 3 studies of roflumilast cream in atopic dermatitis and Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis.

The increased topical JAK inhibitor program costs relate primarily to our Phase 2 studies of ARQ-252 in hand eczema and vitiligo.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount.

The increase in other costs relate primarily to an increase in consulting activity and medical affairs spending.

Research and development expenses increased by $5.1 million, or 6%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase was primarily due to an increase in compensation and personnel-related costs of $10.8 million, an increase in other costs of $7.8 million, and an increase in direct costs related to the topical JAK inhibitor program of $0.7 million.

These increases were partially offset by a decrease in direct costs related to the topical roflumilast program of $14.6 million.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount to manage our growing clinical programs.

The increase in other costs were primarily due to an increase in consulting activity and medical affairs spending.

The increase in topical JAK inhibitor program costs were primarily due to our Phase 2 study of ARQ-252 in vitiligo, partially offset by lower costs related to our Phase 2 study of ARQ-252 in chronic hand eczema.

The decrease in topical roflumilast program costs relate primarily to the completion of the Phase 3 studies of roflumilast cream for plaque psoriasis and the Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp and body psoriasis.

General and Administrative Expenses

General and administrative expenses increased by $16.7 million, or 184%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

General and administrative expenses increased by $27.6 million, or 188%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase was primarily due to an increase in compensation and personnel-related expenses of $18.1 million, and an increase in professional services of $7.8 million.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to the recognition of $5.3 million of incremental stock-based compensation expense as a result of modification to the vesting schedule and exercise term of previously-granted awards in connection with the retirement of our former Chief Financial Officer during the first quarter, as well as an increase in headcount.

The increase in compensation and personnel-related expenses, which includes stock-based compensation, was due to an increase in headcount, coupled with the recognition of $5.3 million of incremental stock-based compensation expense as a result of modification to the vesting schedule and exercise term of previously-granted awards in connection with the retirement of our former Chief Financial Officer during the first quarter.

The increase in professional services was mainly due to an increase in consulting activity and marketing expenses primarily related to roflumilast.

Other Income, Net

Other income, net decreased by $0.7 million, or 87%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Other income, net decreased by $0.7 million, or 78%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The decrease was due to a lower yield on our investment portfolio.

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We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop our product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations.

As of June 30, 2021, we had cash, cash equivalents, restricted cash, and marketable securities of $410.9 million, and an accumulated deficit of $280.0 million.

As of September 30, 2021, we had cash, cash equivalents, restricted cash, and marketable securities of $368.8 million, and an accumulated deficit of $337.0 million.

We anticipate that operating losses and net cash used in operating activities will increase over the next several years as we further develop roflumilast cream, roflumilast foam, ARQ-252, and ARQ-255, move into later and more costly stages of product development, develop new product candidates, hire personnel, and prepare for regulatory submissions and the commercialization of our product candidates.

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On May 6, 2021, we entered into a Sales Agreement, with Cowen, to sell shares of our common stock, from time to time, with aggregate gross sales proceeds of up to $100.0 million through an ATM equity offering program under which Cowen acts as sales agent.

During the six months ended June 30, 2021, we did not issue or sell any shares of our common stock through our ATM.

During the nine months ended September 30, 2021, we did not issue or sell any shares of our common stock through our ATM.

The following table sets forth our cash flows for the periods indicated:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

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Cash provided by financing activities 209,066 168,765

Net increase in cash, cash equivalents, and restricted cash $ 24,046 $ 108,210

Net decrease in cash, cash equivalents, and restricted cash $ (13,304) $ (17,629)

Net Cash Used in Operating Activities

During the six months ended June 30, 2021, net cash used in operating activities was $82.0 million, which consisted of a net loss of $78.1 million and a change in net operating assets and liabilities of $18.6 million offset by net non-cash charges of $14.6 million.

The change in net operating assets and liabilities was primarily due to an increase of $9.8 million in prepaid expenses and other current assets due to an increase in prepaid clinical trials and a decrease of $9.0 million in accounts payable and accrued liabilities due to the timing of payments to contract research organizations and payment of employee bonuses accrued for at December 31, 2020.

During the nine months ended September 30, 2021, net cash used in operating activities was $122.9 million, which consisted of a net loss of $135.0 million and a change in net operating assets and liabilities of $9.2 million, partially offset by net non-cash charges of $21.3 million.

The change in net operating assets and liabilities was primarily due to an increase of $6.1 million in prepaid expenses and other current assets and a decrease of $3.4 million in accounts payable and accrued liabilities due to the timing of payments and lower outstanding accounts payable balances for our contract research organizations (CROs).

The net non-cash charges were primarily related to stock-based compensation expense of $18.2 million.

During the six months ended June 30, 2020, net cash used in operating activities was $46.8 million, which consisted of a net loss of $63.4 million, offset by a change in net operating assets and liabilities of $13.8 million and net non-cash charges of $2.8 million.

The change in net operating assets and liabilities was due to an increase of $14.5 million in accounts payable and accrued liabilities due to our operating expense growth and timing of payments, partially offset by an increase of $0.6 million in prepaid expenses and other current assets.

During the nine months ended September 30, 2020, net cash used in operating activities was $80.5 million, which consisted of a net loss of $101.6 million, offset by a change in net operating assets and liabilities of $15.9 million and net non-cash charges of $5.3 million.

The change in net operating assets and liabilities was primarily due to an increase of $16.3 million in accounts payable and accrued liabilities due to our operating expense growth and timing of payments.

The net non-cash charges were primarily related to stock-based compensation expense of $5.3 million.

Net Cash Used in Investing Activities

During the six months ended June 30, 2021, net cash used in investing activities was $102.9 million, which was comprised primarily of purchases of marketable securities of $211.9 million, partially offset by the proceeds from the maturities of marketable securities of $109.6 million.

During the six months ended June 30, 2020, net cash used in investing activities was $14.2 million, which was comprised primarily of purchases of marketable securities of $62.8 million, partially offset by proceeds from the maturities of marketable securities of $48.6 million.

During the nine months ended September 30, 2021, net cash used in investing activities was $99.5 million, which was comprised primarily of purchases of marketable securities of $244.3 million, partially offset by the proceeds from the maturities of marketable securities of $145.6 million.

During the nine months ended September 30, 2020, net cash used in investing activities was $105.9 million, which was comprised primarily of purchases of marketable securities of $179.4 million, partially offset by proceeds from the maturities of marketable securities of $73.6 million.

Net Cash Provided by Financing Activities

During the six months ended June 30, 2021, net cash provided by financing activities was $209.0 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million.

During the six months ended June 30, 2020, net cash provided by financing activities was $169.2 million, which was comprised primarily of the net cash proceeds received from the IPO of $168.6 million.

During the nine months ended September 30, 2021, net cash provided by financing activities was $209.1 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million.

During the nine months ended September 30, 2020, net cash provided by financing activities was $168.8 million, which was comprised primarily of the net cash proceeds received from the IPO of $168.6 million.

Funding Requirements

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $280.0 million as of June 30, 2021.

We had cash, cash equivalents, and marketable securities of $409.4 million as of June 30, 2021.

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $337.0 million as of September 30, 2021.

We had cash, cash equivalents, and marketable securities of $367.3 million as of September 30, 2021.

Based on our current planned operations, we expect that our current cash, cash equivalents, and marketable securities will be sufficient to fund our operations well into 2023.

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Our future funding requirements will depend on many factors, including, but not limited to:

• the scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting preclinical studies and clinical trials, in particular our planned or ongoing clinical studies of roflumilast cream in plaque psoriasis and atopic dermatitis, roflumilast foam in seborrheic dermatitis and scalp psoriasis, ARQ-252 in hand eczema and vitiligo, and our formulation and preclinical efforts for ARQ-255 for alopecia areata;

• the scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting preclinical studies and clinical trials, in particular our planned or ongoing clinical studies of roflumilast cream in plaque psoriasis and atopic dermatitis, roflumilast foam in seborrheic dermatitis and scalp and body psoriasis, ARQ-252 in chronic hand eczema and vitiligo, and our formulation and preclinical efforts for ARQ-255 for alopecia areata;

• suspensions or delays in the enrollment or changes to the number of patients we decide to enroll in our ongoing clinical trials as a result of the COVID-19 pandemic;

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Contractual Obligations and Contingent Liabilities

The following summarizes our significant contractual obligations as of June 30, 2021:

Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

(in thousands)

Operating leases $ 6,673 $ 114 $ 1,746 $ 2,019 $ 2,794

Total obligations $ 6,673 $ 114 $ 1,746 $ 2,019 $ 2,794

The following summarizes our significant contractual obligations as of September 30, 2021.

Facility Operating Lease

In April 2020, we amended our lease agreement for our facility in Westlake Village, California to relocate to a new expanded space including 22,643 square feet.

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Accordingly, in November 2020, we entered into a letter of credit for $1.5 million, which is secured with a restricted cash account in the same amount.

The total commitment under the operating lease agreement is $6.7 million, including $0.1 million for the remaining three months of 2021, $0.8 million for 2022, $1.0 million for each of the years 2023, 2024 and 2025, and $2.8 million for 2026 and thereafter.

See Note 7 to the unaudited condensed financial statements for additional information.

Manufacturing Agreements

We have entered into manufacturing supply agreements for the commercial supply of topical roflumilast cream which include certain minimum purchase commitments.

Firm future purchase commitments under these agreements are approximately $5.4 million within the next 3 months and then approximately $0.6 million per year for the following 4 years.

This amount does not represent all of the our anticipated purchases, but instead represents only the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts.

Indemnification

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020.

There were no material changes to our critical accounting policies during the six months ended June 30, 2021.

There were no material changes to our critical accounting policies during the nine months ended September 30, 2021.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis