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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-04 · 139 added, 117 removed, 235 unchanged (52% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto as of and for the year ended December 31, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2021, which has been filed with the Securities and Exchange Commission (SEC).

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto as of and for the year ended December 31, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2021, which has been filed with the Securities and Exchange Commission (SEC).

Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans, objectives, expectations, projections, and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

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We are an early commercial-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs.

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

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

We believe we have built the industry's leading platform for dermatologic product development.

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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, ZORYVE TM (roflumilast) cream 0.3%, recently obtained FDA approval on July 29, 2022 for the treatment of plaque psoriasis, including psoriasis in the intertriginous areas (e.g., groin or axillae), in individuals 12 years of age or older.

ZORYVE is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on the duration of use.

We launched our lead product, ZORYVE ® (roflumilast) cream 0.3%, in August 2022 after obtaining FDA approval for the treatment of plaque psoriasis, including psoriasis in the intertriginous areas (e.g., groin or axillae), in individuals 12 years of age or older.

ZORYVE is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use.

In addition, we submitted and Health Canada has accepted a New Drug Submission (NDS) for roflumilast cream for plaque psoriasis in Canada with a target action date of April 30, 2023.

ZORYVE 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 the systematic treatment of dermatological conditions.

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

In addition to the recent approval of ZORYVE for plaque psoriasis, we are also developing roflumilast cream for the treatment of atopic dermatitis.

In atopic dermatitis, we completed enrollment in INTEGUMENT-1, the first of two pivotal Phase 3 clinical trials in subjects six years of age or older.

We continue to enroll subjects in our other two pivotal Phase 3 atopic dermatitis trials:

INTEGUMENT-2 in subjects six years of age or older and INTEGUMENT-PED in subjects between the ages of two and five years.

In atopic dermatitis, we completed enrollment in two of our pivotal Phase 3 clinical trials:

INTEGUMENT-1 and INTEGUMENT-2, in subjects six years of age or older.

We continue to enroll subjects in our other pivotal Phase 3 atopic dermatitis trial, INTEGUMENT-PED, in subjects between the ages of two and five years.

We expect to provide topline data from each of INTEGUMENT-1 and -2 by the end of 2022.

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We expect to provide topline data from INTEGUMENT-PED in 2023 and submit a subsequent sNDA for the younger age cohort following the potential initial atopic dermatitis approval in patients aged six years or older.

We are also developing a topical foam formulation of roflumilast, and have successfully completed a Phase 3 clinical trial in seborrheic dermatitis and completed enrollment in a single pivotal Phase 3 clinical trial in scalp and body psoriasis.

We are also developing a topical foam formulation of roflumilast, and have successfully completed pivotal Phase 3 clinical trials in both seborrheic dermatitis and scalp and body psoriasis.

In seborrheic dermatitis, we announced positive topline data in June 2022 and we expect the data to be a sufficient basis for an NDA submission in the first quarter of 2023.

In our Phase 3 scalp and body psoriasis trial, we anticipate topline data late in the third quarter or early in the fourth quarter of 2022.

If positive, we expect the data to be a sufficient basis for a sNDA submission.

Beyond topical roflumilast, we are developing ARQ-252, a potent and highly selective topical JAK1 inhibitor.

In scalp and body psoriasis, we announced positive topline data in September 2022, which we expect to be a sufficient basis for an sNDA submission following the potential approval of roflumilast foam for seborrheic dermatitis.

Beyond topical roflumilast, we are developing ARQ-252, a cream formulation of a potent and highly selective topical JAK1 inhibitor.

We have Investigational New Drug application-enabling efforts continuing for ARQ-255, an alternative deep-penetrating topical formulation of our JAK1 inhibitor designed to reach deeper into the skin and hair follicle in order to potentially treat alopecia areata.

We expect to initiate a clinical trial of ARQ-255 in alopecia areata in 2022.

In May 2021, we announced that the Phase 2 study of ARQ-252 in chronic hand eczema did not meet its primary endpoint, with further analyses of the study pointing to inadequate local drug delivery to the skin.

Given these analyses, we also elected to terminate the Phase 2a clinical trial evaluating ARQ-252 as a potential treatment in vitiligo, as we began reformulation efforts to develop an enhanced formulation of ARQ-252 that delivers more active drug to targets in the skin.

Additionally, we have Investigational New Drug application (IND)-enabling efforts continuing for ARQ-255, an alternative deep-penetrating topical formulation of ARQ-252 designed to reach deeper into the skin and hair follicle in order to potentially treat alopecia areata.

The ARQ-255 formulation is separate and distinct from ARQ-252, and thus there are no implications to ARQ-255 from ARQ-252.

We expect to initiate a clinical trial of ARQ-255 in alopecia areata in 2022.

In September 2022, we acquired Ducentis and its lead asset, DS-234 (now ARQ-234), a fusion protein that is a potent and highly selective checkpoint agonist of the CD200 Receptor (CD200R).

We plan to develop ARQ-234 for an atopic dermatitis indication that would potentially be a highly complementary treatment option to roflumilast cream in that indication.

We believe the acquisition is a transformative opportunity for Arcutis and, in leveraging our deep dermatology expertise and broad biologics experience, we have the right leadership and operational team to shape the future path of ARQ-234.

Under the terms of the Share Purchase Agreement, we acquired the outstanding shares of Ducentis for an upfront payment of $15.9 million, inclusive of liabilities acquired, and Arcutis stock valued at $12.5 million, as well as future contingent payments based on development and commercial success.

The transaction was accounted for as an asset acquisition and, as a result, a one-time charge to in-process research and development expense of $29.6 million, which includes certain transaction-related expenses, was recognized during the third quarter of 2022.

See Note 6 to the unaudited condensed consolidated financial statements for additional information.

Since our inception in 2016, we have invested a significant portion of our efforts and financial resources in clinical development activities.

We have not generated any revenue from product sales and have funded our operations primarily with the net proceeds from equity and debt offerings.

We only recently started generating revenue from product sales and have historically funded our operations primarily with the net proceeds from equity and debt offerings.

Prior to our IPO, we received $162.5 million in net cash proceeds from private placements of convertible preferred stock which was converted into shares of common stock in connection with our IPO.

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On August 2, 2022, we received $125.0 million in proceeds under the Loan Agreement.

On August 2, 2022, we priced a public offering of 8,625,000 shares of common stock at an offering price of $20.00 per share, including the underwriters full exercise of their option to purchase an additional 1,125,000 shares.

The aggregate net proceeds to us from the offering, including the exercise of the underwriters’ option to purchase additional shares, are expected to be $161.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The offering is expected to close on August 5, 2022.

We have incurred net losses in each year since inception, including net losses of $67.4 million and $131.7 million for the three and six months ended June 30, 2022, respectively, and $42.0 million and $78.1 million for the three and six months ended June 30, 2021, respectively.

As of June 30, 2022, we had an accumulated deficit of $540.0 million and cash, cash equivalents, restricted cash, and marketable securities of $283.4 million.

As of June 30, 2022, we had $75.0 million outstanding under the Loan Agreement.

Upon FDA approval of ZORYVE for the treatment of psoriasis, we drew down an additional $125.0 million under the Loan agreement, which was received on August 2, 2022.

After this draw down, we have $200.0 million outstanding under the Loan Agreement, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We expect to receive $161.7 million from the closing of the public offering of our common stock on August 5, 2022.

We expect to continue to incur losses for the foreseeable future and expect to incur increased expenses as we begin to commercialize ZORYVE in psoriasis and as we advance ZORYVE and our product candidates through clinical trials, regulatory submissions, and commercialization.

We expect to incur significant commercialization expenses related to sales, marketing, manufacturing, and distribution of ZORYVE, and our other product candidates if we obtain regulatory approval for them.

On August 5, 2022, we closed a public offering of our common stock and received $161.6 million of aggregate net proceeds.

We have incurred net losses in each year since inception, including net losses of $107.7 million and $239.4 million for the three and nine months ended September 30, 2022, respectively, and $57.0 million and $135.0 million for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022, we had an accumulated deficit of $647.7 million and cash, cash equivalents, restricted cash, and marketable securities of $478.2 million.

As of September 30, 2022, we had $200.0 million outstanding under our Loan Agreement, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We expect to continue to incur losses for the foreseeable future and expect to incur significant expenses as we commercialize ZORYVE in psoriasis and as we advance ZORYVE as well as our product candidates and label extensions through clinical trials, regulatory submissions, and commercialization.

We expect to incur significant commercialization expenses related to sales, marketing, manufacturing, and distribution of ZORYVE, and our other product candidates and label extensions, if we obtain regulatory approval for them.

If our available cash balances, amounts available under the Loan Agreement, and anticipated future cash flows from operations are insufficient to cover these expenses, we may need to fund our operations through equity or debt financings or other sources, such as future potential collaboration agreements.

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We have no internal manufacturing capabilities, and we will continue to rely on third parties, many of whom are single source suppliers, for our nonclinical and clinical trial materials, as well as the commercial supply of our products.

In addition, we are in the process of completing the build out of our sales organization.

In addition, we recently completed the initial build out of our sales organization.

Accordingly, we expect to incur significant expenses related to our sales organization and our commercial infrastructure to support ZORYVE commercialization.

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We subsequently paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product.

Upon the approval of ZORYVE in July 2022, $7.5 million became payable to AstraZeneca.

We also paid AstraZeneca $7.5 million in the third quarter of 2022 in connection with FDA approval of ZORYVE.

We have agreed to make additional cash payments to AstraZeneca of up to an aggregate of $5.0 million upon the achievement of specific regulatory approval milestones with respect to the AZ-Licensed Products, and payments up to an additional aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones, of which $5.0 million will become payable when we achieve $100.0 million in worldwide sales.

With respect to any AZ-Licensed Products we commercialize under the AstraZeneca License Agreement, we will pay AstraZeneca a low to high single-digit percentage royalty rate on our, our affiliates’ and our sublicensees’ net sales of such AZ-Licensed Products, until, as determined on an AZ-Licensed Product-by-AZ-Licensed Product and country-by-country basis, the later of the date of the expiration of the last-to-expire AstraZeneca-licensed patent right containing a valid claim in such country and ten years from the first commercial sale of such AZ-Licensed Product in such country.

See Note 6 to the unaudited condensed financial statements for additional information.

Accordingly, in September 2022, we began to accrue royalties payable to AstraZeneca as a result of the commercialization and generation of net sales related to ZORYVE.

See Note 6 to the unaudited condensed consolidated financial statements for additional information.

Hengrui Exclusive Option and License Agreement

In January 2018, we entered into the Hengrui License Agreement, with Hengrui, whereby Hengrui granted us an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a Janus Kinase (JAK) 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Canada, Japan, and the European Union (including for clarity the United Kingdom).

In January 2018, we entered into the Hengrui License Agreement, with Hengrui, whereby Hengrui granted us an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a JAK 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Canada, Japan, and the European Union (including for clarity the United Kingdom).

We made a $0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement.

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In June 2022, we entered into a side letter agreement with Hengrui and one of its subsidiaries to extend certain rights and obligations under the Hengrui License Agreement to the subsidiary under specified circumstances, including a change of control of such subsidiary.

See Note 6 to the unaudited condensed financial statements for additional information.

See Note 6 to the unaudited condensed consolidated financial statements for additional information.

Components of Our Results of Operations

In August 2022, in conjunction with the launch of our first FDA approved product, ZORYVE, we began to recognize revenue from product sales, net of rebates, chargebacks, discounts, and other adjustments.

We will continue to evaluate trends related to revenue momentum for ZORYVE.

If our development efforts for our other product candidates and label extensions are successful and result in regulatory approval, we may generate additional revenue in the future from product sales.

Cost of Sales

Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our net product sales and amortization of intangible assets associated with ZORYVE.

Operating Expenses

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To date, none of our license agreements have been considered to be an acquisition of a business.

For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects.

For asset acquisitions, such as with Ducentis, the upfront payments, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects.

The successful development of our product candidates is highly uncertain.

At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of roflumilast cream, roflumilast foam, ARQ-252, and ARQ-255, or any future product candidates.

This is due to the numerous risks and uncertainties associated with the development of product candidates.

See “Risk Factors” for a discussion of the risks and uncertainties associated with the development of our product candidates.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel.

Other general and administrative expenses include costs related to sales and marketing as we begin commercialization of ZORYVE, legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for marketing, auditing, tax, and general legal services.

We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and begin commercialization of ZORYVE, increase our headcount, and support our operations as a public company;

Selling, General, and Administrative Expenses

Our selling, general, and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel.

Other selling, general, and administrative expenses include costs related to sales and marketing of ZORYVE, legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for marketing, auditing, tax, and general legal services.

We expect our selling, general, and administrative expenses to continue to increase in the future as we expand our operating activities and continue to commercialize ZORYVE, increase our headcount, and support our operations;

including increased expenses related to legal, accounting, insurance, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors and officers liability insurance premiums, and investor relations activities.

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Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

Comparison of the Three Months Ended September 30, 2022 and 2021

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

2022 2021 $ %

(in thousands)

Product revenue, net $ 725 $ — $ 725 *

Total revenues 725 — 725 *

Operating expenses:

Cost of sales 269 — 269 *

Research and development 69,731 40,604 29,127 72 %

General and administrative 27,622 11,315 16,307 144 %

Selling, general, and administrative 35,473 16,474 18,999 115 %

Total operating expenses 105,473 57,078 48,395 85 %

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*Not applicable

Product revenue, net

We began recording product revenues in the third quarter of 2022 following the FDA approval of ZORYVE and our subsequent commercial launch in the U.S.

in August 2022.

During the three months ended September 30, 2022, we recognized $0.7 million of net product revenues related to sales of ZORYVE.

Revenues were driven by end customer demand as well as an initial build up of inventories by our wholesaler customers.

Sales discounts consisted primarily of co-pay card discounts and distribution fees.

Cost of Sales

Cost of sales of $0.3 million for the three months ended September 30, 2022 is related primarily to amortization of intangible assets as a result of the milestone payment to AstraZeneca in connection with the FDA approval of ZORYVE.

Cost of sales also included product costs incurred after FDA approval as well as royalties on net sales payable to AstraZeneca under a license agreement.

Research and Development Expenses

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

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Other early stage programs 132 178 (46) (26) %

In-process research and development 29,630 — 29,630 *

Indirect costs:

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Total research and development expense $ 69,731 $ 40,604 $ 29,127 72 %

Research and development expenses increased by $7.4 million, or 24%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase was primarily due to an increase in direct costs related to the topical roflumilast program of $4.2 million, an increase in compensation and personnel-related costs of $3.9 million, and an increase in other costs of $2.7 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 $3.4 million.

The increase in topical roflumilast program costs was primarily due to increased manufacturing costs and, to a lesser extent, clinical trial costs .

Manufacturing costs increased due to the timing of purchases of roflumilast active pharmaceutical ingredient (API) and manufacturing of commercial supply ahead of launch.

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

Research and development expenses increased by $29.1 million, or 72%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The increase was primarily due to IPR&D expense as a result of the acquisition of ARQ-234 from Ducentis, an increase in compensation and personnel-related costs of $2.8 million, and an increase in other costs of $1.4 million, partially offset by a decrease in direct costs related to the topical roflumilast program of $4.8 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 other costs was primarily due to an

increase in medical affairs spending and consulting activity.

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

General and Administrative Expenses

General and administrative expenses increased by $16.3 million, or 144%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase was primarily due higher compensation and personnel-related expenses of $9.5 million, higher sales and marketing expenses of $4.1 million, and higher professional services of $1.9 million.

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

The increase in sales and marketing expenses was primarily related to commercialization efforts for ZORYVE.

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

The decrease in topical roflumilast program costs was primarily due to the completion of Phase 3 studies of roflumilast foam in seborrheic dermatitis and scalp and body psoriasis.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased by $19.0 million, or 115%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The increase was primarily due to higher compensation and personnel-related expenses of $9.7 million, higher sales and marketing expenses of $7.3 million, and higher professional services of $1.2 million.

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

The increase in sales and marketing expenses was primarily related to commercialization efforts.

The increase in professional services was due to an increase in consulting activity.

Other Income, Net

Other income, net increased by $0.3 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to a larger marketable securities balance for the three months ended June 30, 2022.

Other income, net increased by $1.8 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to the impact of rising interest rates and a larger marketable securities balance for the three months ended September 30, 2022.

Interest Expense

Interest expense increased by $2.0 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to interest expense related to our long-term debt.

Comparison of the Six Months Ended June 30, 2022 and 2021

Interest expense increased by $4.9 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, due to interest expense related to our long-term debt.

Comparison of the Nine Months Ended September 30, 2022 and 2021

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

2022 2021 $ %

(in thousands)

Product revenue, net $ 725 $ — $ 725 *

Total revenues 725 — 725 *

Operating expenses:

Cost of sales 269 — 269 *

Research and development 148,558 93,000 55,558 60 %

General and administrative 49,628 25,769 23,859 93 %

Selling, general, and administrative 85,101 42,243 42,858 101 %

Total operating expenses 233,928 135,243 98,685 73 %

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*Not applicable

Product revenue, net

We began recording product revenues in the third quarter of 2022 following the approval of ZORYVE by the FDA and our subsequent commercial launch in the U.S.

on August 10, 2022.

During the nine months ended September 30, 2022, we recognized $0.7 million of net product revenues related to sales of ZORYVE.

Revenues were driven by end customer demand as well as an initial build up of inventories by our wholesaler customers.

Sales discounts consisted primarily of co-pay card discounts and distribution fees.

Cost of Sales

Cost of sales of $0.3 million for the nine months ended September 30, 2022 is related primarily to amortization of intangible assets as a result of the milestone payment to AstraZeneca in connection with the FDA approval of ZORYVE.

It also included product costs incurred after FDA approval as well as royalties on net sales payable to AstraZeneca under a license agreement.

Research and Development Expenses

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

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Other early stage programs 625 434 191 44 %

In-process research and development 29,630 — 29,630 *

Indirect costs:

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Total research and development expense $ 148,558 $ 93,000 $ 55,558 60 %

Research and development expenses increased by $26.4 million, or 50%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase was primarily due to an increase in direct costs related to the topical roflumilast program of $19.6 million, compensation and personnel-related costs of $8.2 million, and an increase in other costs of $4.5 million.

Research and development expenses increased by $55.6 million, or 60%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was primarily due to IPR&D expense as a result of the acquisition of ARQ-234 from Ducentis, an increase in direct costs related to the topical roflumilast program of $14.8 million, compensation and personnel-related costs of $11.0 million, and an increase in other costs of $5.9 million.

These increases were partially offset by a decrease in direct costs related to the topical JAK inhibitor program of $6.0 million.

The increase in topical roflumilast program costs relate primarily to increased clinical trial costs and increased manufacturing.

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

Manufacturing costs increased due to the timing of purchases of roflumilast API and manufacturing of commercial supply ahead of launch.

The increase in topical roflumilast program costs relate primarily to increased clinical trial costs due to the ongoing Phase 3 studies of roflumilast cream in atopic dermatitis and higher manufacturing costs.

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

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

General and Administrative Expenses

General and administrative expenses increased by $23.9 million, or 93%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased by $42.9 million, or 101%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was primarily due to an increase in compensation and personnel-related expenses of $20.9 million, an increase in sales and marketing expenses of $14.9 million, and an increase in professional services of $4.8 million.

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

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

The increase in sales and marketing expenses was primarily related to commercialization efforts for ZORYVE.

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Other Income, Net

Other income, net increased by $0.4 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to a larger marketable securities balance for the six months ended June 30, 2022.

Other income, net increased by $2.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to the impact of rising interest rates and a larger marketable securities balance for the nine months ended September 30, 2022.

Interest Expense

Interest expense increased by 3.8 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to interest expense related to our long-term debt.

Interest expense increased by 8.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, due to interest expense related to our long-term debt.

Liquidity, Capital Resources, and Requirements

Sources of Liquidity

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 nonclinical and clinical trials and providing general and administrative support for these operations.

As of June 30, 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $283.4 million, and an accumulated deficit of $540.0 million.

As of June 30, 2022, we had $75.0 million outstanding under our Loan Agreement.

Upon FDA approval of ZORYVE, we drew down an additional $125 million under the Loan Agreement, which we received on August 2, 2022.

After this draw down, we have $200 million outstanding under the Loan Agreement and $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

We expect to receive $161.7 million from the closing of the public offering of our common stock on August 5, 2022.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

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

As of September 30, 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $478.2 million, and an accumulated deficit of $647.7 million.

Upon FDA approval of ZORYVE, we drew down an additional $125.0 million under the Loan Agreement and, as of September 30, 2022, had $200.0 million outstanding, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We also received $161.6 million in aggregate net proceeds from the closing of the public offering of our common stock in August 2022.

See Notes 1 and 8 to the unaudited condensed consolidated financial statements for additional information.

We have historically financed our operations primarily through private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020, February 2021, and August 2022, our Loan Agreement, and 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)

Cash used in operating activities $ (186,650) $ (122,918)

Cash provided by (used in) investing activities 67,862 (102,923)

Cash used in investing activities (129,400) (99,452)

Cash provided by financing activities 300,836 209,066

Net increase (decrease) in cash, cash equivalents, and restricted cash $ (35,246) $ 24,046

Net decrease in cash, cash equivalents, and restricted cash $ (15,214) $ (13,304)

Net Cash Used in Operating Activities

During the six months ended June 30, 2022, net cash used in operating activities was $119.0 million, which consisted of a net loss of $131.7 million and a change in net operating assets and liabilities of $4.0 million, partially offset by net non-cash charges of $16.8 million.

The net non-cash charges were primarily related to stock-based compensation expense of $14.6 million.

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, 2022, net cash used in operating activities was $186.7 million, which consisted of a net loss of $239.4 million and a change in net operating assets and liabilities of $2.8 million, partially offset by net non-cash charges of $55.6 million.

The net non-cash charges were primarily related to acquired in-process research and development of $29.6 million and stock-based compensation expense of $23.4 million.

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.

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

Net Cash Provided by (Used in) Investing Activities

During the six months ended June 30, 2022, net cash provided by investing activities was $67.9 million, which was comprised primarily of proceeds from the maturities of marketable securities of $203.8 million, partially offset by purchases of marketable securities of $135.7 million.

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 nine months ended September 30, 2022, net cash used in investing activities was $129.4 million, which was comprised primarily of purchases of marketable securities of $377.3 million, cash paid for IPR&D related to the acquisition of Ducentis of $15.5 million and a milestone payment made to AstraZeneca of $7.5 million, partially offset by the proceeds from the maturities of marketable securities of $271.1 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.

Net Cash Provided by Financing Activities

During the six months ended June 30, 2022, net cash provided by financing activities was $15.8 million, which was comprised primarily of the net cash proceeds received from shares sold under our ATM of $14.5 million.

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 nine months ended September 30, 2022, net cash provided by financing activities was $300.8 million, which was comprised primarily of the net cash proceeds received from our August 2022 public stock offering of $161.6 million, our August 2022 debt facility draw down of $125.0 million, and our March 2022 sale of stock under our ATM facility of $14.5 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.

Funding Requirements

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $540.0 million as of June 30, 2022.

We had cash, cash equivalents, and marketable securities of $282.2 million as of June 30, 2022.

As of June 30, 2022, we had $75.0 million outstanding under the Loan Agreement.

Upon FDA approval of ZORYVE, we drew down an additional $125.0 million under the Loan Agreement which we received on August 2, 2022.

Following this draw down, we have $200.0 million outstanding under the Loan Agreement, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

We expect to receive $161.7 million from the closing of the public offering of our common stock on August 5, 2022.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

If our available cash balances, amounts available under the Loan Agreement and anticipated future cash flows from operations are insufficient to satisfy our liquidity requirements, we may need to fund our operations

through the sale of our equity securities, accessing or incurring additional debt, entering into licensing or collaboration agreements with partners, grants, or other sources of financing.

We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $647.7 million as of September 30, 2022.

We had cash, cash equivalents, and marketable securities of $477.0 million as of September 30, 2022.

We also received $161.6 million from the closing of the public offering of our common stock in August 2022.

See Notes 1 and 8 to the unaudited condensed consolidated financial statements for additional information.

We believe that our existing capital resources will be sufficient to meet the projected operating requirements for at least 12 months from the date of issuance of its financial statements.

If our available cash balances, amounts available under the Loan Agreement, and anticipated future cash flows from operations are insufficient to satisfy our liquidity requirements, we may need to fund our operations through the sale of our equity securities, accessing or incurring additional debt, entering into licensing or collaboration agreements with partners, grants, or other sources of financing.

There can be no assurance that sufficient funds will be available to us at all or on attractive terms when needed from these sources.

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Each tranche B term loan is available following delivery to SLR of satisfactory evidence that we have received FDA Approval of roflumilast cream for an indication relating to the treatment of patients with plaque psoriasis, which we refer to as the FDA Approval.

With the approval of ZORYVE on July 29, 2022, we drew down $125.0 million on the tranche B term loans, which we received on August 2, 2022.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

With the approval of ZORYVE, we drew down $125.0 million on the tranche B term loans, which we received in August 2022.

See Notes 1 and 8 to the unaudited condensed consolidated financial statements for additional information.

The tranche C term loan is available following the achievement of a net product revenue milestone of $110.0 million, calculated on a trailing six month basis.

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(or on any successor or substitute published rate) for a term of one month, subject to a replacement with an alternate benchmark rate and spread in certain circumstances.

On June 30, 2022, the rate was 8.57%.

On September 30, 2022, the rate was 10.08%.

Interest payments are payable monthly following the funding of any Term Loan.

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provided, however, that such financial covenant shall not apply if our average market capitalization over the trailing five day period prior to the last day of any measurement month is equal to or in excess of $400.0 million.

We were in compliance with all covenants under the Loan Agreement as of June 30, 2022.

We were in compliance with all covenants under the Loan Agreement as of September 30, 2022.

In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans.

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Contractual Obligations and Contingent Liabilities

The following summarizes our significant contractual obligations as of June 30, 2022.

The following summarizes our significant contractual obligations as of September 30, 2022.

Facility Operating Lease

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The amended lease agreement required that we deliver a letter of credit to the landlord of $1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met.

Accordingly, as of June 30, 2022, we have a letter of credit and related restricted cash account of $1.2 million.

The total commitment under the operating lease agreement is $6.2 million, including $0.4 million for the remaining six months of 2022, $1.0 million for each of the years 2023 through 2027, and $0.6 million for the year 2028.

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

Accordingly, as of September 30, 2022, we have a letter of credit and related restricted cash account of $1.2 million.

The total commitment under the operating lease agreement is $6.0 million, including $0.3 million for the remaining three months of 2022, $1.0 million for each of the years 2023 through 2027, and $0.7 million for the year 2028.

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

Long-Term Debt Obligations

As of June 30, 2022, we had $75.0 million outstanding under our Loan Agreement.

As of September 30, 2022, we had $200.0 million outstanding under our Loan Agreement.

Upon FDA approval of ZORYVE, we drew down an additional $125.0 million under the Loan Agreement which we received on August 2, 2022.

After this draw down, we have $200.0 million outstanding under the Loan Agreement and $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

See Notes 8 and 12 to the unaudited condensed financial statements for additional information.

The total commitment under the Loan Agreement as of June 30, 2022 is $109.5 million, including $3.3 million for the remaining six months of 2022, $6.5 million for each of the years 2023 through 2026, and $80.2 million for 2027.

These amounts do not represent or include any future draw downs, but instead represent only the contractually obligated minimum payments of interest, principal, and loan fees related to the funding of the $75.0 million tranche A term loan on December 22, 2021.

After this draw down, we have $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

See Notes 1 and 8 to the unaudited condensed consolidated financial statements for additional information.

The total commitment under the Loan Agreement as of September 30, 2022 is $305.3 million, including $5.4 million for the remaining three months of 2022, $21.5 million for each of the years 2023 through 2026, and $213.9 million for 2027.

License Agreements

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The amount and timing of such obligations are unknown or uncertain.

Upon FDA approval of ZORYVE on [July 29, 2022], a $7.5 million milestone payment became payable to AstraZeneca.

These potential obligations are further described in Note 6 to the unaudited condensed financial statements.

These potential obligations are further described in Note 6 to the unaudited condensed consolidated financial statements.

Manufacturing Agreements

We have entered into manufacturing supply agreements for the commercial supply of ZORYVE, which include certain minimum purchase commitments.

Firm future purchase commitments under these agreements are approximately $8.1 million within the next six months and then approximately $0.6 million per year for the following three years.

Firm future purchase commitments under these agreements are approximately $2.9 million within the next three months, with an annual commitment of approximately $2.1 million for the year 2023, and approximately $0.6 million per year for 2024 and 2025.

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.

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Critical Accounting Policies and Use of Estimates

The preparation of our condensed financial statements in conformity with U.S.

The preparation of our condensed consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements.

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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, 2021.

There were no material changes to our critical accounting policies during the six months ended June 30, 2022.

We began to sell ZORYVE in August 2022.

As such, we identified additional critical accounting policies as of September 30, 2022 related to revenue, accounts receivable, inventory, and intangibles, further described in Note 2 to the Condensed Consolidated Financial Statements, “Summary of Significant Accounting Policies” to our financial statements.

Other than these policies, there were no material changes to our critical accounting policies during the nine months ended September 30, 2022.

Recent Accounting Pronouncements

See Note 2 to our unaudited condensed financial statements.

See Note 2 to our unaudited condensed consolidated financial statements.

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