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Item 1. Business

2023-02-28 compared with 2022-02-22 · 325 added, 298 removed, 560 unchanged (53% of the section changed)

We are a late-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.

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

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 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 and commercialization.

Our strategy is to focus on validated biological targets, and to use our drug development platform and deep dermatology expertise to develop differentiated products that have the potential to address the major shortcomings of existing therapies in our targeted indications.

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

Our lead product candidate, roflumilast cream, has successfully completed pivotal Phase 3 clinical trials in plaque psoriasis, demonstrating symptomatic improvement and favorable tolerability in this population.

We have submitted a New Drug Application (NDA) to the U.S.

Food and Drug Administration (FDA), and the FDA has set a Prescription Drug User Fee Act (PDUFA) action date of July 29, 2022.

Roflumilast is a highly potent and selective phosphodiesterase type 4, or PDE4, inhibitor, an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for the systemic treatment of 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.

We have also successfully completed a long-term safety study of roflumilast cream in plaque psoriasis subjects, showing continued symptomatic improvement and favorable tolerability over a treatment period of 52 to 64 weeks.

In atopic dermatitis, we have initiated three pivotal Phase 3 clinical studies:

INTEGUMENT-1 and -2 are enrolling subjects six years of age or older and INTEGUMENT-PED is enrolling 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.

We intend to submit a supplemental New Drug Application (sNDA) for topical roflumilast cream for the treatment of atopic dermatitis patients aged six years or older in 2023 based on the results of INTEGUMENT-1 and -2.

Due to the inherent challenges of enrolling young children in clinical trials, together with impacts on enrollment from COVID-19, we now expect to provide topline data from INTEGUMENT-PED in 2023.

We intend to submit a subsequent sNDA for the younger age cohort based on INTEGUMENT-PED 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 Phase 2 clinical trials in both seborrheic dermatitis and scalp and body psoriasis.

In seborrheic dermatitis, we initiated a single pivotal Phase 3 clinical trial, with topline data anticipated in mid-year 2022.

We also initiated a single pivotal Phase 3 clinical trial in scalp and body psoriasis, with topline data anticipated in the second half of 2022.

If these pivotal Phase 3 trials for roflumilast foam are positive, we expect the data to be a sufficient basis for an NDA submission to the FDA for each indication.

Beyond topical roflumilast, we are developing ARQ-252, a potent and highly selective topical Janus kinase type 1, or JAK1, inhibitor.

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

We launched our lead product, ZORYVE ® (roflumilast) cream 0.3%, in August 2022 after obtaining Food and Drug Administration (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 December 2022, we submitted a supplemental New Drug Application (sNDA) for ZORYVE for an expanded indication in plaque psoriasis down to the age of two, with potential FDA approval in the fourth quarter of 2023.

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 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 are conducting or have completed three pivotal Phase 3 clinical studies:

INTEGUMENT-1 and -2 enrolled subjects six years of age or older and INTEGUMENT-PED is enrolling subjects between the ages of two and five years.

In the fourth quarter of 2022, we announced positive topline data from both INTEGUMENT-1 and -2 in atopic dermatitis.

We intend to submit an sNDA for topical roflumilast cream for the treatment of atopic dermatitis in patients aged six years or older in the second half of 2023 based on the results of INTEGUMENT-1 and -2.

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

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 submitted a New Drug Application (NDA) for the treatment of moderate-to-severe seborrheic dermatitis to the FDA in February 2023, supported by the positive results from the pivotal Phase 3 STRATUM trial, with potential FDA approval in late 2023.

In scalp and body psoriasis, we announced positive topline data in September 2022 and we expect the data to be a sufficient basis for an sNDA submission in the first quarter of 2024, following the potential approval of roflumilast foam for treatment of seborrheic dermatitis.

Beyond topical roflumilast, we are developing ARQ-255, a deep-penetrating topical formulation of ivarmacitinib, a potent and highly selective topical Janus kinase type 1 (JAK1) inhibitor, designed to preferentially deliver the drug deep into the hair follicle, the site of inflammation in alopecia areata, in order to potentially develop the first topical treatment for this disease.

In December 2022, we announced that the first subject had been enrolled

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in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata.

We are also developing ARQ-252, an alternative cream formulation of ivarmacitinib for chronic hand eczema, vitiligo, and other inflammatory dermatoses.

In September 2022, we acquired Ducentis BioTherapeutics LTD (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).

Currently in the preclinical stage, we plan to develop ARQ-234 in atopic dermatitis, where we believe it could be a potentially highly complementary biologic treatment option to roflumilast cream in that indication, if approved.

ARQ-234 could potentially be used to treat other inflammatory conditions as well.

Dermatological diseases such as psoriasis, atopic dermatitis, seborrheic dermatitis, hand eczema, alopecia areata, and vitiligo affect hundreds of millions of people worldwide each year, impacting their quality of life, and physical, functional, and emotional well-being.

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In psoriasis, vitamin D analogs are also used, but have lower response rates than TCS and are frequently irritating.

Topical tapinarof was approved in May 2022 for the treatment of adults with plaque psoriasis, but this non-steroidal agent also carries significant application site reactions.

In atopic dermatitis, topical calcineurin inhibitors, or TCIs, and crisaborole (Eucrisa ® ), a topical non-steroidal PDE4 inhibitor, are used, but have lower response rates than TCS and are associated with application site burning.

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Biologic and systemic therapies are also available for some diseases, but are typically indicated for a small percentage of the affected population.

Biologics for psoriasis and atopic dermatitis have shown impressive response rates but are only indicated for the minority of patients with moderate-to-severe forms of disease, are expensive, and often face reimbursement and access restrictions.

Biologics for psoriasis have shown impressive response rates but are only indicated for the minority of patients with moderate-to-severe forms of disease, are expensive, and often face reimbursement and access restrictions.

Treatment with oral systemic therapies such as methotrexate and apremilast (Otezla ® ) has also been limited given modest symptomatic improvement and the frequency of adverse events.

Additionally, many patients on biologic and systemic therapies still require adjunctive topical therapy to treat residual symptoms.

In atopic dermatitis, biologic and systemic therapy continues to evolve, and we see opportunity to continue to advance the standard of care for patients with moderate-to-severe disease, for example with regard to response rates and dosing frequency.

Given the limitations associated with existing treatments, we believe patients with inflammatory skin conditions and their dermatologists are dissatisfied with their current treatment options.

We believe that there is a significant opportunity to leverage developments in other fields of medicine, particularly inflammation and immunology, to address the significant need for effective chronic treatments in immuno-dermatology.

Our initial focus is to address patients’ significant need for innovative topical treatments that directly target molecular mediators of disease, have the potential to show significant symptomatic improvement, maintain a low risk of toxicity or side effects, and are suitable for chronic use on all areas of the body.

Our initial development and commercial focus is to address patients’ significant need for innovative topical treatments that directly target molecular mediators of disease, have the potential to show significant symptomatic improvement, maintain a low risk of toxicity or side effects, and are suitable for chronic use on all areas of the body.

Based on market research and our internal estimates, we estimate our primary addressable market opportunity, which focuses on U.S.

patients treated by dermatologists with topical therapies, at 5 million patients across psoriasis, atopic dermatitis, and seborrheic dermatitis.

patients treated in dermatology offices with topical therapies, at 7 million patients across psoriasis, atopic dermatitis, and seborrheic dermatitis.

There are millions of additional U.S.

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The following charts summarize our product pipeline and our upcoming anticipated milestones:

Our Portfolio and Pipeline

The following chart summarizes our product portfolio and pipeline:

* Note on above chart:

We submitted and Health Canada has accepted an NDS for roflumilast cream for plaque psoriasis in Canada with a target action date of April 30, 2023.

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Key elements of our strategy include:

• Rapidly develop and commercialize our lead product candidate, roflumilast cream, for the treatment of patients with plaque psoriasis and atopic dermatitis.

Based on the clinical data generated to date, we believe roflumilast cream has the potential to be the best-in-class non-steroidal topical treatment, with symptomatic improvement in psoriasis patients similar to the combination of a high potency steroid and calcipotriene while potentially delivering a low risk of side effects and a favorable tolerability profile that enables chronic administration, including for pediatric patients.

In plaque psoriasis, we have successfully completed pivotal Phase 3 clinical trials, as well as a long-term safety study.

We have submitted an NDA to the FDA, and the FDA has set a PDUFA action date of July 29, 2022.

In atopic dermatitis, we have initiated three pivotal Phase 3 clinical studies:

INTEGUMENT-1 and -2 are enrolling subjects six years of age or older, and INTEGUMENT-PED is enrolling 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.

We intend to submit an sNDA for topical roflumilast cream for the treatment of atopic dermatitis patients aged six years or older in 2023 based on the results of INTEGUMENT-1 and -2.

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.

• Commercialize ZORYVE cream for the treatment of patients with plaque psoriasis, and obtain approval for roflumilast cream for atopic dermatitis.

We believe ZORYVE is a best-in-class non-steroidal topical treatment for plaque psoriasis, with symptomatic improvement in psoriasis patients similar to the combination of a high potency steroid and calcipotriene, the ability to use anywhere on the body including sensitive areas, a rapid and significant impact on itch, coupled with a low rate of side effects and a favorable tolerability profile that enables chronic administration, including for pediatric patients.

We commercially launched ZORYVE 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.

In atopic dermatitis, we have completed two pivotal Phase 3 clinical studies with topical roflumilast:

INTEGUMENT-1 and -2 in subjects six years of age or older, and we are conducting a third pivotal Phase 3 study, INTEGUMENT-PED, in subjects between the ages of two and five years.

In the fourth quarter of 2022, we announced positive topline data from both INTEGUMENT-1 and -2 in atopic dermatitis.

We intend to submit an sNDA for topical roflumilast cream for the treatment of atopic dermatitis patients aged six years or older in the second half of 2023 based on the results of INTEGUMENT-1 and -2.

• Expand our addressable market with roflumilast foam.

We are developing a foam formulation of roflumilast for the treatment of scalp and body psoriasis and seborrheic dermatitis, diseases impacting hair-bearing areas of the body where a cream is not suitable.

We have successfully completed Phase 2 clinical trials with roflumilast foam in both seborrheic dermatitis and scalp psoriasis, demonstrating promising efficacy and tolerability in both diseases.

In seborrheic dermatitis, we initiated a single pivotal Phase 3 clinical trial, with topline data anticipated in mid-year 2022.

We also initiated a single pivotal Phase 3 clinical trial in scalp and body psoriasis, with topline data anticipated in the second half of 2022.

If these pivotal Phase 3 trials for roflumilast foam are positive, we expect the data to be sufficient basis for an NDA submission to the FDA for each indication.

We have successfully completed pivotal Phase 3 clinical trials with roflumilast foam in both seborrheic dermatitis and scalp and body psoriasis, demonstrating promising efficacy and tolerability in both diseases.

In seborrheic dermatitis, we submitted an NDA to the FDA in February 2023, supported by the positive results from the pivotal Phase 3 STRATUM trial.

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

• Establish an integrated development and commercial organization .

We believe the concentrated prescriber base of the U.S.

dermatology segment provides us with the opportunity to build a fully integrated commercial organization and targeted sales force for the commercialization of our product candidates among dermatology specialists.

We have built a fully integrated commercial organization and targeted specialty sales force for the commercialization of our products among dermatology specialists.

Because of the concentrated prescriber base of the U.S.

dermatology segment, we believe our infrastructure should be sufficient for us to commercialize our products to dermatology specialists.

To further enhance the value of our product candidates, we may selectively seek partners to commercialize our products outside of the dermatology specialist segment, and to develop and commercialize our products outside of the U.S.

• Further expand our product portfolio through the development of ARQ-252/ARQ-255.

We are developing ARQ-252 and ARQ-255, both of which contain a JAK1 inhibitor with a high relative selectivity to JAK1 over Janus kinase type 2, or JAK2, inhibitor for the treatment of chronic hand eczema and vitiligo, and potentially alopecia areata.

Given its high relative selectivity to JAK1 over JAK2, we believe ARQ-252 and ARQ-255 have the potential to treat inflammatory diseases without causing the hematopoietic adverse effects associated with JAK2 inhibition, giving it the potential to be best-in-class.

Our formulation and nonclinical efforts for ARQ-255, an alternative deep-penetrating topical formulation of ARQ-252 designed to reach deeper into the skin in order to potentially treat alopecia areata, are continuing.

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

• Price our drugs responsibly to enable rapid and high-quality insurance coverage .

We are committed to helping patients have access to our product, including setting a responsible price, working with payers to help ensure broad high-quality payer access, and supporting programs like our Arcutis Cares TM patient assistance program and the ZORYVE Direct TM patient access support program.

• Further expand our product portfolio through the development of ARQ-255 and ARQ-252.

We are developing ARQ-255 and ARQ-252, both of which contain ivarmacitinib, a JAK1 inhibitor with a high relative selectivity to JAK1 over Janus kinase type 2, or JAK2, for the treatment of alopecia areata, chronic hand eczema, and vitiligo.

Given their high relative selectivity to JAK1 over JAK2, we believe ARQ-255 and ARQ-252 have the potential to treat inflammatory diseases without causing the hematopoietic adverse effects associated with JAK2 inhibition, which in turn gives them the potential to be best-in-class treatment options, if approved.

In December 2022, we announced that the first subject had been enrolled in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata.

Reformulation efforts continue for ARQ-252.

• Develop ARQ-234 as a complimentary treatment to topical roflumilast.

We believe that ARQ-234, which we obtained through the acquisition of Ducentis in September 2022, has the potential to have a highly differentiated profile and could be a highly complimentary biologic treatment to topical roflumilast

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for the treatment of atopic dermatitis, if approved.

We believe our management team's experience in developing dermatological drugs, including biologics, will enable us to rapidly move ARQ-234 into the clinic and through the development process.

• Leverage our product development platform to continue innovating and developing novel new treatments for dermatological diseases.

Our expertise in dermatological clinical development and commercialization allows us to identify areas of high unmet needs, and our product development platform may allow us to develop novel new treatments that address those needs, as it has already with roflumilast cream, roflumilast foam, and ARQ-252/ARQ-255.

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• Evaluate strategic opportunities to in - license best-in-class dermatology assets consistent with our core strategy.

Leveraging our deep expertise in identifying promising drug candidates in dermatology, we will continue to seek best-in-class assets across treatment modalities directed against validated targets.

• Evaluate strategic opportunities to in - license or acquire best-in-class dermatology assets consistent with our core strategy.

Leveraging our deep expertise in identifying promising drug candidates in dermatology, we will continue to seek best-in-class assets, similar to ARQ-234, across treatment modalities directed against validated targets.

We will continue to explore opportunities to in-license assets and develop them to address unmet medical needs in dermatology.

We believe one of our core strengths is that we have built the industry's leading platform for dermatology product development.

We believe one of our core strengths is our leading platform for dermatology product development.

This platform, coupled with our deep expertise in dermatology clinical development and commercialization, is the engine that allows us to generate our highly differentiated product candidates.

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Roflumilast Cream (ARQ-151)

Our lead product candidate, roflumilast cream, has the potential to offer symptomatic improvement in psoriasis patients similar to the combination of a high potency steroid and calcipotriene, a favorable tolerability profile, the ability to be used chronically, and little to none of the application site reactions associated with many existing topical treatments.

Roflumilast cream is designed for simple once-a-day application for chronic use, does not burn or sting on application, and can be used on any part of the body, including sensitive or difficult-to-treat areas, such as the face and intertriginous regions.

Our lead product, ZORYVE, offers symptomatic improvement in psoriasis patients similar to the combination of a high potency steroid and calcipotriene, a favorable tolerability profile, the ability to be used chronically, and little to none of the application site reactions associated with many existing topical treatments.

ZORYVE is designed for simple once-a-day application for chronic use, does not burn or sting on application, and can be used on any part of the body, including sensitive or difficult-to-treat areas, such as the face and intertriginous regions.

It quickly and easily rubs into the skin without leaving a greasy residue, does not stain clothing or bedding, or have an unpleasant smell.

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Roflumilast has demonstrated a potency advantage of approximately 25x to in excess of 300x compared to the active ingredients in the two other FDA-approved PDE4 inhibitors, Eucrisa and Otezla.

We are currently developing roflumilast cream for plaque psoriasis, including intertriginous psoriasis, as well as atopic dermatitis.

We have successfully completed pivotal Phase 3 clinical trials, as well as a long-term safety study, in plaque psoriasis.

We have submitted an NDA to the FDA, and the FDA has set a PDUFA action date of July 29, 2022.

In atopic dermatitis, we completed our Phase 2 proof of concept study and initiated our Phase 3 clinical program.

The atopic dermatitis Phase 3 program includes 4 studies:

We commercially launched ZORYVE 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.

Index to Financial Statements

We are also developing topical roflumilast cream for atopic dermatitis, and our Phase 3 program includes four studies:

two identical studies with approximately 650 subjects each, ages 6 and above (INTEGUMENT-1 and -2);

a study with approximately 650 subjects ages 2-5 (INTEGUMENT-PED);

a study with more than 650 subjects ages 2-5 in each study (INTEGUMENT-PED);

and an open label extension study with up to 1,500 subjects (INTEGUMENT-OLE).

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

We intend to submit an sNDA for topical roflumilast cream for the treatment of atopic dermatitis patients aged six years or older in 2023 based on the results of INTEGUMENT-1 and -2.

In the fourth quarter of 2022, we announced positive topline data from the INTEGUMENT-1 and -2 studies in atopic dermatitis.

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

In July 2018, we executed a licensing agreement with AstraZeneca AB (AstraZeneca) for exclusive worldwide rights to roflumilast as a topical product in humans solely for dermatological indications.

We have built our own intellectual property portfolio around topical uses of roflumilast, with issued and pending formulation, pharmacokinetic, and method-of-use patents in the United States and other jurisdictions from several distinct patent families, which should provide us with exclusivity for our product at least into 2037.

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Plaque Psoriasis

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At least 40% of plaque psoriasis patients have plaques on their scalp, about 15% have plaques in their intertriginous regions, approximately 10% have plaques on their face, and one in three has plaques on their elbows and knees.

Each of these areas present a variety of treatment challenges which may be well suited to treatment with topical roflumilast.

Each of these areas present a variety of treatment challenges which may be well suited to treatment with ZORYVE.

Psoriasis patients are generally characterized as mild, moderate, or severe, with approximately 75% experiencing a mild-to-moderate form of the disease and 25% experiencing a moderate-to-severe form of the disease.

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Current Psoriasis Treatment Landscape

The vast majority of psoriasis patients are treated with topical therapies, of which there have been no novel treatments approved in over 20 years.

Despite their widespread use, existing topical therapies all possess substantial shortcomings:

The vast majority of psoriasis patients are treated with topical therapies, of which there have been no novel treatments approved in over 20 years, until the recent approvals of ZORYVE and tapinarof.

Despite their widespread use, other existing topical therapies all possess substantial shortcomings:

• Topical steroids are associated with a number of side effects, including, among others, hypothalamic-pituitary-adrenal (HPA) axis suppression, skin atrophy (thinning), striae (stretch marks), and telangiectasia (spider veins).

Some of these side effects are irreversible.

Consequently, high potency topical steroids are not recommended for chronic use, and physicians generally will not prescribe them for treatment on the face or in the intertriginous regions.

Consequently, high potency topical steroids are

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not recommended for chronic use, and physicians generally will not prescribe them for treatment on the face or in the intertriginous regions.

Steroid-induced striae (left) and Steroid-induced skin atrophy (right)

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• Vitamin D3/steroid combinations offer better symptomatic improvement than either of the two individual components alone, but still carry a risk of HPA axis suppression, and are limited in their duration of use.

• Tapinarof is a non-steroidal topical aryl hydrocarbon receptor (AhR) agonist approved in May 2022 for adults with plaque psoriasis.

In clinical trials, treatment with tapinarof was associated with folliculitis, contact dermatitis, burning, stinging, and itching.

Because high potency steroids and combinations containing high potency steroids provide robust symptomatic improvement for psoriasis patients, most physicians initiate treatment for nearly all patients with them.

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These “step down” options provide less symptomatic improvement and are often irritating.

Also, rebound is a known challenge with steroids, where psoriasis returns even worse than before steroid treatment.

Also, rebound is a known challenge with steroids, where the recurrence of psoriasis after steroid discontinuation is more severe than it was prior to steroid treatment.

As a result, patients are constantly cycling between effective short courses of high potency steroids and less effective “step down” maintenance treatments.

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Atopic dermatitis is characterized by a defect in the skin barrier, which allows allergens and other irritants to enter the skin, leading to an immune reaction and inflammation.

This reaction produces a red, itchy rash, most frequently occurring on the face, arms and legs, and the rash can cover significant areas of the body (see figures below).

The rash causes significant pruritus (itching), which can lead to damage caused by scratching or rubbing and perpetuating an ‘itch-scratch’ cycle.

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Atopic Dermatitis Lesions

reaction produces a red, itchy rash, most frequently occurring on the face, arms and legs, and the rash can cover significant areas of the body (see figures below).

The rash causes significant pruritus (itching), which can lead to damage caused by scratching or rubbing and perpetuating an ‘itch-scratch’ cycle.

Atopic Dermatitis

Given the high proportion of pediatric patients, safety and tolerability of atopic dermatitis treatments is paramount.

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• Eucrisa is a topical non-steroidal PDE4 inhibitor approved by the FDA in 2016.

Despite initial interest among the physician community to adopt the product, its growth has been hampered by modest symptomatic improvement, frequent occurrences of application site burning and stinging, and disadvantaged reimbursement status compared to other atopic dermatitis treatments.

• Opzelura is a topical JAK inhibitor approved in September 2021 for the treatment of mild to moderate atopic dermatitis.

The label carries an extensive boxed warning for serious infections, all-cause mortality, malignancy, major adverse cardiovascular events and thrombosis, and the product is limited to short-term, non-continuous use after failure of other treatments.

Treatment with biologics like Dupixent remains highly restricted.

In the United States, less than 2% of all atopic dermatitis patients are on biologic therapy.

The uptake of biologics has remained limited due to multiple factors, including the fact that they are indicated only for use in moderate-to-severe patients, their high cost and patient co-payments, reimbursement and access restrictions, and patient fear of injection.

Despite initial interest among the physician community to adopt the product, its growth has been hampered by frequent occurrences of application site burning and stinging as well as disadvantaged reimbursement status compared to other atopic dermatitis treatments.

• Opzelura is a topical JAK inhibitor approved in September 2021 for the topical short-term and non-continuous chronic treatment of mild-to-moderate atopic dermatitis in non-immunocompromised adult and pediatric patients 12 years of age and older whose disease is not adequately controlled with topical prescription therapies or when those therapies are not advisable .

The label carries an extensive boxed warning for serious infections, all-cause mortality, malignancy, major adverse cardiovascular events and thrombosis.

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Treatment with biologics such as Dupixent ® , as well as recently launched oral agents, remains highly restricted.

In the United States, less than 5% of all atopic dermatitis patients are on biologic therapy.

The uptake of biologics and systemic therapies is expected to grow, as the efficacy and dosing parameters of treatment options for moderate-to-severe disease states improve;

however, similar to plaque psoriasis, we believe such use will ultimately remain limited due to multiple factors, including the fact that they are indicated only for use in moderate-to-severe patients, their high cost and patient co-payments, reimbursement and access restrictions, and patient fear of injection for biologics.

Roflumilast Cream Clinical Development

Plaque Psoriasis

We have successfully completed the pivotal clinical studies of roflumilast cream in plaque psoriasis, and submitted an NDA to the FDA.

The FDA has set a PDUFA action date of July 29, 2022.

Our NDA submission is supported by the positive data from the pivotal Phase 3 clinical studies, DERMIS-1 and DERMIS-2, and our long-term Phase 2b open label study.

In all trials, roflumilast cream was generally well-tolerated with a favorable safety and tolerability profile.

We commercially launched ZORYVE 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 duration of use.

Our NDA submission was supported by the positive data from the pivotal Phase 3 clinical studies, DERMIS-1 and DERMIS-2, and our long-term Phase 2b open label study.

In all trials, ZORYVE was generally well-tolerated with a favorable safety and tolerability profile.

Key Completed Trials

ARQ-151-301 and 302 (DERMIS-1 and DERMIS-2 pivotal Phase 3 studies)

The DERMIS-1 and DERMIS-2 studies were identical pivotal Phase 3 randomized, parallel, double-blind, vehicle-controlled, multi-national, multi-center studies in which subjects age 2 years and above with mild, moderate, or severe chronic plaque psoriasis involving between 2% and 20% body surface area received 8 weeks of (i) roflumilast cream 0.3% once daily or (ii) matching vehicle once daily.

The DERMIS-1 and DERMIS-2 studies were identical pivotal Phase 3 randomized, parallel, double-blind, vehicle-controlled, multi-national, multi-center studies in which subjects age 2 years and above with mild, moderate, or severe chronic plaque psoriasis involving between 2% and 20% body surface area received 8 weeks of (i) ZORYVE cream 0.3% once daily or (ii) matching vehicle once daily.

DERMIS-1 enrolled 439 subjects and DERMIS-2 enrolled 442 subjects.

Results from the eight-week treatment period demonstrated statistically significant improvement compared to the matching vehicle on key efficacy endpoints.

On the studies’ primary efficacy endpoint of percentage of subjects achieving Investigator Global Assessment (IGA) success, which was defined as a score of “clear” or “almost clear” plus a 2-grade improvement from baseline at week 8, 42.4% of subjects treated with roflumilast cream achieved IGA Success, compared to 6.1% of subjects treated with vehicle (p < 0.0001) in DERMIS-1, and 37.5% of subjects treated with roflumilast cream achieved IGA Success, compared to 6.9% of subjects treated with vehicle (p<0.0001) in DERMIS-2.

Roflumilast cream also demonstrated statistically significant improvements over vehicle on key secondary endpoints, including on Intertriginous IGA Success, Psoriasis Area Severity Index-75, reductions in itch as measured by the Worst Itch-Numerical Rating Scale, and patient perceptions of symptoms as measured by the Psoriasis Symptoms Diary (PSD).

Roflumilast cream was well-tolerated by the patient populations, with rates of treatment-emergent adverse events (“TEAEs”) low and similar to vehicle, with most TEAEs assessed as mild to moderate in severity.

Of the subjects treated with roflumilast cream, five subjects (1.7% of subjects) in DERMIS-1 and one subject (0.3% of subjects) in DERMIS-2 discontinued the study due to a TEAE.

On the studies’ primary efficacy endpoint of percentage of subjects achieving Investigator Global Assessment (IGA) success, which was defined as a score of “clear” or “almost clear” plus a 2-grade improvement from baseline at week 8, 42.4% of subjects treated with ZORYVE achieved IGA Success, compared to 6.1% of subjects treated with vehicle (p < 0.0001) in DERMIS-1, and 37.5% of subjects treated with ZORYVE achieved IGA Success, compared to 6.9% of subjects treated with vehicle (p<0.0001) in DERMIS-2.

ZORYVE also demonstrated statistically significant improvements over vehicle on key secondary endpoints, including on Intertriginous IGA Success, Psoriasis Area Severity Index-75, reductions in itch as measured by the Worst Itch-Numerical Rating Scale, and patient perceptions of symptoms as measured by the Psoriasis Symptoms Diary (PSD).

ZORYVE was well-tolerated by the patient populations, with rates of treatment-emergent adverse events (“TEAEs”) low and similar to vehicle, with most TEAEs assessed as mild-to-moderate in severity.

Of the subjects treated with ZORYVE, five subjects (1.7% of subjects) in DERMIS-1 and one subject (0.3% of subjects) in DERMIS-2 discontinued the study due to a TEAE.

There were no treatment-related serious adverse events.

ARQ-151-202 (Long-Term Safety Study)

The long-term safety study was a Phase 2, multi-center, open label study of the long-term safety and efficacy of roflumilast cream 0.3% in adult subjects with chronic plaque psoriasis involving up to 25% total body surface area (BSA), evaluated in two cohorts:

The long-term safety study was a Phase 2, multi-center, open label study of the long-term safety and efficacy of ZORYVE cream 0.3% in adult subjects with chronic plaque psoriasis involving up to 25% total body surface area (BSA), evaluated in two cohorts:

subjects who completed the ARQ-151-201 Phase 2b, randomized, controlled trial;

and previously untreated subjects.

All subjects applied roflumilast cream 0.3% once daily for 52 weeks at home.

Approximately half (164 out of 332) of the subjects entered this long-term study after completing treatment with roflumilast cream 0.3% or 0.15% in the randomized Phase 2b study (ARQ-151-201) and therefore received up to 64 weeks of total treatment with roflumilast cream (12 weeks in the randomized Phase 2b study and 52 weeks in the long-term safety study).

All subjects applied ZORYVE once daily for 52 weeks at home.

Approximately half (164 out of 332) of the subjects entered this long-term study after completing treatment with ZORYVE cream 0.3% or 0.15% in the randomized Phase 2b study (ARQ-151-201) and therefore received up to 64 weeks of total treatment with ZORYVE (12 weeks in the randomized Phase 2b study and 52 weeks in the long-term safety study).

Periodic clinic visits included assessments for clinical safety, application site reactions, and disease improvement or progression.

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Index to Financial Statements

In this open label study, roflumilast cream 0.3% applied once daily for up to 52 weeks demonstrated favorable safety and tolerability over the long-term treatment period, consistent with what was seen in the randomized Phase 2b study, with only 3.6% of subjects experiencing a treatment-related adverse event during 52 weeks of treatment.

Additionally, a d urable treatment effect was maintained through 52 to 64 weeks.

In this open label study, ZORYVE cream 0.3% applied once daily for up to 52 weeks demonstrated favorable safety and tolerability over the long-term treatment period, consistent with what was seen in the randomized Phase 2b study, with only 3.6% of subjects experiencing a treatment-related adverse event during 52 weeks of treatment.

Additionally, a d urable treatment effect was maintained through 52 to 64 weeks as 57.1% (n=185) of roflumilast cream-treated patients achieved an IGA score of clear or almost clear (IGA 0/1) at any time in study, and these participants had a median duration of IGA of clear or almost clear of more than 10 months (40.1 weeks).

At week 52 of the long-term safety study, 44.8% of all subjects attained an IGA Success of clear or almost clear, with 34.8% of subjects in Cohort 1 and 39.5% of subjects in Cohort 2 achieving IGA Success, defined as a score of clear or almost clear plus a 2-grade improvement from baseline.

Additionally, of the subjects in the 12-week randomized Phase 2b study who were treated with roflumilast cream 0.3%, and who attained an IGA of clear or almost clear at 12 weeks in the first study, then continued on treatment in the long-term safety study, 66.7% had an IGA of clear or almost clear at the end of 64 weeks of treatment or their last visit.

Additionally, of the subjects in the 12-week randomized Phase 2b study who were treated with ZORYVE cream 0.3%, and who attained an IGA of clear or almost clear at 12 weeks in the first study, then continued on treatment in the long-term safety study, 66.7% had an IGA of clear or almost clear at the end of 64 weeks of treatment or their last visit.

Of the 332 subjects in this study, 73.5% completed the full 52 weeks of open label treatment, with only 3.9% of subjects discontinuing the study due to an adverse event and less than 1% of subjects discontinuing due to lack of efficacy.

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Atopic Dermatitis

In the fourth quarter of 2022, we announced positive topline data from the INTEGUMENT-1 and -2 studies in atopic dermatitis.

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

Key Completed Trials

The most recent study completed with roflumilast cream in atopic dermatitis was a multi-center, double-blind, vehicle-controlled proof of concept Phase 2 study, in which 136 adolescents (ages 12 and above) and adults with mild to moderate atopic dermatitis involving between 1.5% and 35% BSA were randomized across three arms to receive once daily topical applications for 4 weeks of:

(1) roflumilast cream 0.15%, or (2) roflumilast cream 0.05%, or (3) vehicle.

The goals of this small proof of concept study were to establish whether roflumilast cream provides a signal of potential symptomatic improvement in atopic dermatitis subjects, as well as to gain an understanding of its tolerability.

Completion rates for the study were 98% in the roflumilast cream 0.15% arm, 91% in the roflumilast cream 0.05% arm, and 93% in the vehicle arm.

On the study's primary endpoint, the absolute change from baseline in the Eczema Area and Severity Index (EASI) Total Score after 4 weeks of once daily treatment, neither dose reached statistical significance versus vehicle, although roflumilast cream 0.15% showed a trend towards significance, with a mean improvement of 6.4 in subjects treated with roflumilast cream 0.15% compared to 4.8 in subjects treated with vehicle (p = 0.097).

On the secondary endpoint of mean percent change from baseline on EASI, roflumilast cream 0.15% demonstrated a statistically significant improvement versus vehicle (72.3% versus 55.8%, p = 0.049).

Efficacy was also observed at both doses as measured by EASI-75 (roflumilast cream 0.05%:

59.1% versus vehicle:

31.1%, p = 0.009 and roflumilast cream 0.15%:

52.3% versus vehicle:

31.1%, p = 0.045).

On the Validated Investigator Global Assessment - Atopic Dermatitis (vIGA-AD), roflumilast cream 0.15% also demonstrated a statistically significant improvement versus vehicle in the percentage of subjects achieving clear or almost clear (roflumilast cream 0.15%:

52.3% versus vehicle:

31.1%, p = 0.040).

In this study, both doses of roflumilast cream were well-tolerated.

95% of subjects on active treatment completed the full study.

The incidence of treatment-related TEAEs and application site reactions were low (< 5%) and similar between active treatment and vehicle.

All TEAEs were mild to moderate in severity.

Among subjects receiving roflumilast cream, there was only one serious adverse event (SAE), which was unrelated to treatment, and only one discontinuation due to a TEAE.

We believe the consistent evidence of improvement in atopic dermatitis signs and symptoms demonstrated by both strengths of roflumilast cream across multiple endpoints, as well as the magnitude of improvement demonstrated on both doses in this small proof-of-concept study, demonstrate the ability of roflumilast cream to effectively treat atopic dermatitis.

Additionally, this study provided valuable insights into the safety and tolerability of roflumilast cream in this population, an especially important consideration because the majority of atopic dermatitis sufferers are young children.

While the study did not reach statistical significance on every endpoint, the consistency of evidence for improvement in atopic dermatitis, coupled with favorable tolerability data, provides us with the confidence to continue the development of roflumilast cream in atopic dermatitis.

ARQ-151-311 and 312 (INTEGUMENT-1 and INTEGUMENT-2 pivotal Phase 3 studies)

Our atopic dermatitis Phase 3 program includes four studies, two ongoing studies (INTEGUMENT-PED and INTEGUMENT-OLE), and the two completed studies INTEGUMENT-1 and -2.

INT-1 and INT-2 were multi-center, double-blind, vehicle-controlled Phase 3 studies, with more than 650 subjects in each study, ages 6 and above with mild-to-moderate atopic dermatitis.

Subjects were randomized to receive once daily topical applications for 4 weeks of roflumilast cream 0.15%, or vehicle.

The primary endpoint was the proportion of all randomized subjects who attain IGA Success, defined as a validated Investigator Global Assessment – Atopic Dermatitis (vIGA-AD) score of ‘clear’ or ‘almost clear’ plus a 2-grade improvement from Baseline at week 4.

Both INTEGUMENT-1 and INTEGUMENT-2 met their primary endpoint.

In INTEGUMENT-1, 32.0% of individuals treated with roflumilast cream 0.15% achieved IGA Success, compared to 15.2% of individuals treated with vehicle (P<0.0001).

In INTEGUMENT-2, 28.9% of individuals treated with roflumilast cream 0.15% achieved IGA Success at Week 4 compared to 12.0% of individuals treated with vehicle (P<0.0001).

Roflumilast cream also demonstrated rapid and statistically significant improvements compared to vehicle on key secondary endpoints, including, in INTEGUMENT-1, 43.2% of individuals treated with roflumilast cream 0.15% achieving a 75% improvement in Eczema Area and Severity Index (EASI-75) at Week 4 compared to 22.0% treated with vehicle (P<0.0001).

In INTEGUMENT-2, 42.0% of individuals treated with roflumilast cream 0.15% achieved an EASI-75 at Week 4 compared to 19.7% treated with vehicle (P<0.0001).

In an additional secondary endpoint, INTEGUMENT-1 evaluated reduction in itch in individuals 12 years of age and older, with 33.6% of individuals treated with roflumilast cream achieving a 4-point reduction in Worst Itch Numeric Scale (WI-NRS) at Week 4 (vs.

20.7% for vehicle-treated subjects [p<0.01]).

For INTEGUMENT-2, 30.2% of individuals treated with roflumilast cream achieving a four-point reduction in WI-NRS at Week 4 (vs.

12.4% for vehicle-treated subjects, [P<0.01]).

Roflumilast cream 0.15% was well tolerated in both studies.

The incidence of Treatment Emergent Adverse Events (TEAEs) was low in both active treatment and vehicle arms, with most TEAEs assessed as mild-to-moderate severity.

Overall, incidence of adverse events were low, with no adverse event occurring in more than 3.5% of subjects in either arm for either INTEGUMENT-1 or INTEGUMENT-2.

The most frequent adverse events (≥1%) included COVID-19, application site pain, headache, nausea, vomiting, diarrhea, nasopharyngitis, and upper respiratory tract infection.

Over 90% of patients who were randomized to roflumilast cream in both studies completed the full four weeks, and there were few discontinuations due to adverse events.

Index to Financial Statements

Key Ongoing Trials

The atopic dermatitis Phase 3 program includes four studies.

INTEGUMENT-1 and -2 are multi-center, double-blind, vehicle-controlled Phase 3 studies, in approximately 650 subjects in each study, ages 6 and above with mild to moderate atopic dermatitis.

Subjects have been randomized to receive once daily topical applications for 4 weeks of roflumilast cream 0.15%, or vehicle.

The primary endpoint is the proportion of all randomized subjects who attain IGA Success, defined as a vIGA-AD score of ‘clear’ or ‘almost clear’ plus a 2-grade improvement from Baseline at week 4.

Sharing a similar overall design, INTEGUMENT-PED is a multi-center, double-blind, vehicle-controlled Phase 3 study in approximately 650 subjects ages 2-5 with mild to moderate atopic dermatitis.

Our atopic dermatitis Phase 3 program includes two key ongoing trials.

INTEGUMENT-PED shares a similar overall design to INTEGUMENT-1 and -2, and is a multi-center, double-blind, vehicle-controlled Phase 3 study in approximately 650 subjects ages 2-5 with mild-to-moderate atopic dermatitis.

Subjects have been randomized to receive once daily topical application for 4 weeks of roflumilast cream 0.05%, or vehicle and the primary endpoint is also the proportion of all randomized subjects who attain IGA Success at week 4.

INTEGUMENT-OLE is an open label extension study that is enrolling up to 1,500 subjects who have completed INTEGUMENT-1, -2, or -PED.

We expect to provide topline data from INTEGUMENT-PED in the second half of 2023.

In addition, INTEGUMENT-OLE is an open label extension study that is enrolling up to 1,500 subjects who have completed INTEGUMENT-1, -2, or -PED.

Subjects are to be treated for up to 52 weeks and the primary endpoints are the occurrence of TEAEs and SAEs.

We expect to provide topline data from each of INTEGUMENT-1 and -2 by the end of 2022, and from INTEGUMENT-PED in 2023.

Roflumilast Foam (ARQ-154)

We are also developing a foam formulation of topical roflumilast for the treatment of scalp psoriasis and seborrheic dermatitis.

We are also developing a foam formulation of topical roflumilast for the treatment of scalp and body psoriasis and seborrheic dermatitis.

Roflumilast foam contains the same highly potent and selective PDE4 inhibitor in roflumilast cream, and is nearly identical to roflumilast cream, with all ingredients in the foam being the same as those in the cream, other than reduced oil content and the addition of a propellant in the can to create the foam.

Roflumilast foam is a light foam, similar to hair mousse, that has been designed to deliver the drug to the scalp while not leaving a greasy residue or disturbing hair style.

Roflumilast foam is a light foam that has been designed to deliver the drug to the scalp while not leaving a greasy residue or disturbing hair style.

The foam breaks easily upon agitation, creating a thin solution that can be rubbed easily into the scalp.

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Roflumilast foam is designed for simple once-a-day application and neither burns nor stings on application.

We have successfully completed Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp and body psoriasis, demonstrating promising efficacy and tolerability in both diseases, and are currently conducting pivotal Phase 3 studies in both indications.

We have successfully completed pivotal Phase 3 studies of roflumilast foam in seborrheic dermatitis (STRATUM) as well as scalp and body psoriasis (ARRECTOR), demonstrating promising efficacy and tolerability in both diseases.

We submitted an NDA for roflumilast foam in seborrheic dermatitis in February 2023, and plan to submit an sNDA for roflumilast foam in scalp and body psoriasis following the potential approval of roflumilast foam for treatment of seborrheic dermatitis.

We believe that roflumilast foam may offer physicians and patients a highly differentiated clinical profile that is ideally suited to address unmet needs in the topical treatment of seborrheic dermatitis and scalp psoriasis.

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The disease causes red patches covered with large, greasy, flaking yellow-gray scales, and is frequently itchy.

It appears most often on the scalp, face (especially on the nose, eyebrows, ears, and eyelids), upper chest, and back as depicted in the figure below.

It appears most often on the scalp, face (especially on the nose, eyebrows, ears, and eyelids), upper chest, and back as depicted in the figures below.

A milder variant of the disease is dandruff.

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Roflumilast Foam Clinical Development

We have successfully completed Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis.

In seborrheic dermatitis, we initiated a single pivotal Phase 3 clinical trial, with topline data anticipated in mid-year 2022.

We also initiated a single pivotal Phase 3 clinical trial in scalp and body psoriasis, with topline data anticipated in the second half of 2022.

If these pivotal Phase 3 trials for roflumilast foam are positive, we expect the data to be sufficient basis for an NDA submission to the FDA for each indication.

We have successfully completed pivotal Phase 3 clinical trials in both seborrheic dermatitis and scalp and body psoriasis.

In seborrheic dermatitis, we submitted an NDA to the FDA in February 2023, supported by positive results from the pivotal Phase 3 STRATUM trial.

Seborrheic Dermatitis

Key Completed Trials

ARQ-154-203 (Phase 2 Study)

Study ARQ-154-203 enrolled 226 adult subjects with moderate-to-severe seborrheic dermatitis.

This 8-week, multi-center, multi-national, double-blind, vehicle-controlled study evaluated the safety and efficacy of roflumilast foam 0.3% administered once daily to affected areas on the scalp, face, and body.

Roflumilast foam 0.3% administered once daily for 8 weeks demonstrated statistically significant improvement compared to a matching vehicle foam on key efficacy endpoints in subjects with moderate-to-severe seborrheic dermatitis.

On the study’s primary endpoint assessed at week 8, roflumilast foam 0.3% achieved an IGA Success rate of 73.8% compared to a vehicle rate of 40.9% (p<0.0001).

IGA Success is defined as the achievement of an IGA score of ‘clear’ or ‘almost clear’ on a 5-grade scale plus at least a two-point change from baseline.

The onset of effect was rapid, with roflumilast foam statistically separating from vehicle as early as week 2, the first visit after baseline, on IGA Success as well as multiple secondary endpoints.

For example, at week 8, 64.6% of subjects treated with roflumilast foam who had a baseline WI-NRS score of 4 achieved an itch reduction of at least 4 points compared to 34.0% of vehicle treated subjects (p=0.0007).

Other secondary endpoints included overall assessment of erythema and overall assessment of scaling, which also had positive outcomes.

Importantly, roflumilast foam was well-tolerated, with rates of application site adverse events, treatment-related adverse events, and discontinuations due to adverse events low and similar to vehicle.

Only 2 out of 154 subjects (1.3%) treated with roflumilast foam discontinued the study due to an adverse event, compared to 1 out of 72 subjects (1.4%) treated with the vehicle.

ARQ-154-304 (STRATUM pivotal Phase 3 Study)

The " ST udy of R oflumilast foam A pplied T opically for the red U ction of seborrheic der M atitis" (STRATUM) was a Phase 3, parallel group, double blind, vehicle-controlled study of the safety and efficacy of roflumilast foam 0.3% administered once-daily.

A total of 457 subjects ages nine and older with moderate to severe seborrheic dermatitis were enrolled in the study and randomized 2:1 to roflumilast foam or vehicle.

The primary endpoint of the study was the proportion of subjects achieving IGA Success, defined as an IGA score of “clear” or “almost clear” plus a 2-point improvement at week eight.

The study met the primary endpoint, with 80.1% of individuals treated with roflumilast foam achieving IGA Success at week eight, compared to 59.2% of patients treated with vehicle (P<0.0001).

Improvement with roflumilast foam was seen early, with roflumilast separating statistically from vehicle on IGA Success at week two.

In addition, 50.7% of patients treated with roflumilast foam achieved an IGA score of clear at week eight, compared to 28.2% of patients treated with vehicle (p < 0.0001).

Roflumilast foam also demonstrated statistically significant improvements compared to vehicle on key secondary endpoints, including itch as measured by Worst Itch-Numerical Rating Score (WI-NRS).

63.6% of patients with a Worst Itch-Numerical Rating Score of 4 or higher at baseline treated with roflumilast foam achieved a 4-point or greater reduction in itch at week eight, compared to patients treated with vehicle (p = 0.0002).

Index to Financial Statements

Key Ongoing and Upcoming Trials

ARQ-154-304 (Phase 3 Study)

The " ST udy of R oflumilast foam A pplied T opically for the red U ction of seborrheic der M atitis" (STRATUM) is a Phase 3, parallel group, double blind, vehicle-controlled study of the safety and efficacy of roflumilast 0.3% foam administered once-daily in approximately 450 subjects ages nine and older with moderate to severe seborrheic dermatitis.

The primary endpoint of the study is the proportion of subjects achieving IGA Success, defined as an IGA score of “clear” or “almost clear” plus a 2-point improvement at eight weeks.

Roflumilast foam was well-tolerated.

The incidence of TEAEs was low and similar between active treatment and vehicle, with most TEAEs assessed as mild-to-moderate severity.

There were no treatment-related serious adverse events.

Overall, the most common adverse events in the study population (over 1%) included COVID-19, urinary tract infection, nasopharyngitis, and nausea.

Of the subjects treated with roflumilast foam in the trial, 91% of subjects completed the full eight weeks, and there were few discontinuations due to adverse events (0.7% of subjects treated with roflumilast foam and 2.0% of the subjects in the vehicle group).

ARQ-154-214 (Long-Term Safety)

Study ARQ-154-214 is an ongoing multi-center, open label Phase 2 long-term safety study of roflumilast foam 0.3% applied once daily in subjects with seborrheic dermatitis.

This study includes subjects who were treated previously in the Phase 2 trial (ARQ-154-203), as well as subjects naive to treatment with roflumilast foam.

Periodic clinic visits will include assessments for clinical safety, application site reactions, and disease improvement, or progression.

Study ARQ-154-214 was a multi-center, open label Phase 2 long-term safety study of roflumilast foam 0.3% applied once daily in subjects with seborrheic dermatitis.

This study included subjects who were treated previously in the Phase 2 trial (ARQ-154-203), as well as subjects naive to treatment with roflumilast foam.

Periodic clinic visits assessed clinical safety, application site reactions, and disease improvement, or progression.

Scalp Psoriasis

Key Completed Trials

ARQ-154-204 (Phase 2b Study)

Study ARQ-154-204 was a multi-center, multi-national, double-blind, vehicle-controlled Phase 2b study, in which 304 adolescents (ages 12 and above) and adults with scalp psoriasis covering at least 10% of the total scalp involvement and up to 25% of total psoriasis involvement in all body areas were randomized to receive 8 weeks of (1) roflumilast foam 0.3% once daily, or (2) matching vehicle once daily.

Randomization was 2:1, active to vehicle.

The primary endpoint of the trial was achievement of a Scalp IGA (S-IGA) scale score of “clear” or “almost clear” plus a 2-grade improvement from baseline, or S-IGA, at week 8.

Multiple secondary endpoints were also evaluated.

Roflumilast foam demonstrated statistically significant improvements compared to a matching vehicle foam on key efficacy endpoints.

On the study’s primary endpoint of S-IGA Success assessed at week 8, roflumilast foam 0.3% achieved a rate of 59.1% compared to a vehicle rate of 11.4% (p<0.0001).

Onset was rapid, with significantly higher rates of S-IGA Success noted as early as 2 weeks.

Multiple secondary endpoints were also met.

On the key secondary endpoint of Body Investigator Global Assessment (B-IGA) success assessed at week 8, roflumilast foam 0.3% achieved a rate of 40.3% compared to a vehicle rate of 6.8% (p<0.0001), with separation from vehicle on B-IGA Success as early as 2 weeks.

Symptomatic improvement was also demonstrated, with 71.0% of subjects treated with roflumilast foam 0.3% who had a baseline Scalp Itch Numeric Rating Scale score of 4 or greater achieving an itch reduction of at least 4 points at week 8 compared to 18.5% of vehicle treated subjects (p<0.0001).

Consistent with other clinical trials of topical roflumilast, roflumilast foam was well-tolerated, as evidenced by subject-reported local tolerability and rates of application site adverse events, treatment-related adverse events, and discontinuations due to adverse events low and similar to vehicle.

Only 5 out of 200 subjects (2.5%) in the roflumilast foam treated group discontinued the study due to an adverse event, compared to 2 out of 104 subjects (1.9%) treated with the vehicle.

Key Ongoing and Upcoming Trials

ARQ-154-309 (Phase 3 Study)

The “ A R andomized t R ial E mploying topi C al roflumilasT foam to treat scalp ps OR iasis” (ARRECTOR) study is a parallel group, double blind, vehicle-controlled pivotal Phase 3 study of the safety and efficacy of roflumilast 0.3% foam or a matching vehicle administered once-daily in approximately 420 subjects with scalp and body psoriasis ages 12 and older.

The co-primary endpoints of the study include the proportion of subjects achieving S-IGA success and the proportion of subjects achieving B-IGA success, with IGA success defined as an IGA score of ‘clear’ or ‘almost clear’ plus a 2-point improvement from baseline after eight weeks.

ARQ-154-309 (ARRECTOR pivotal Phase 3 Study)

The “ A R andomized t R ial E mploying topi C al roflumilasT foam to treat scalp ps OR iasis” (ARRECTOR) study was a parallel group, double blind, vehicle-controlled pivotal Phase 3 study of the safety and efficacy of roflumilast foam 0.3% or a matching vehicle administered once-daily in subjects with scalp and body psoriasis ages 12 and older.

A total of 432 subjects were enrolled in the study and randomized 2:1 to roflumilast foam or vehicle.

The co-primary endpoints of the study were the proportion of subjects achieving scalp IGA (S-IGA) success and the proportion of subjects achieving body IGA (B-IGA) success, with IGA success on both endpoints defined as an IGA score of ‘clear’ or ‘almost clear’ plus a 2-point improvement from baseline after eight weeks.

The study met both co-primary endpoints and all secondary endpoints.

Specifically, 67.3% of individuals treated with roflumilast foam achieved S-IGA Success at week eight, compared to 28.1% of individuals treated with vehicle (P<0.0001), and 46.5% of individuals treated with roflumilast foam achieved B-IGA Success at week eight, compared to 20.8% of individuals treated with vehicle (P<0.0001).

Roflumilast foam also demonstrated statistically significant improvements compared to vehicle on all secondary endpoints, including scalp itch as measured by Scalp Itch Numeric Rating Scale (SI-NRS) and overall itch as measured by Worst Itch-Numerical Rating Score (WI-NRS).

Roflumilast foam was well-tolerated, with the incidence of TEAEs low and generally similar to vehicle, with most TEAEs assessed as mild-to-moderate severity.

Overall, the most common adverse events in the study population (over 2%) included headache, diarrhea, and COVID-19.

In the study, 89.0% of patients who were treated with roflumilast foam completed the full eight weeks, and few subjects discontinued the study due to adverse events (2.5% of subjects treated with roflumilast foam and 1.3% of the subjects in the vehicle group).

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).

CD200R is an immune-regulatory receptor that is thought to be an important immunological checkpoint with a pivotal role in the maintenance of immune tolerance.

Checkpoint agonism is an emerging immunomodulatory approach that works to amplify pathways that inhibit over-active immune cells and suppress unwanted immune responses.

ARQ-234 binds to CD200R and has the potential to restore immune homeostasis by inducing inhibitory signaling on immune cells that regulate inflammation.

Index to Financial Statements

ARQ-252 is topical cream formulation of a potent and highly selective small molecule inhibitor of JAK1 that we are developing for chronic hand eczema and vitiligo.

In a nonclinical study, ARQ-252 proved to be highly selective to JAK1 over JAK2.

CD200R has been validated as a target in atopic dermatitis, with preclinical data for ARQ-234 and clinical data for a similar molecule under development by another company each providing evidence of a robust and durable therapeutic response, even after discontinuation of treatment.

Ducentis completed preclinical comparisons of ARQ-234 against the clinically-validated CD200R antibody.

The data compare favorably across key metrics including potency, efficacy, and pharmacokinetics and indicated potential differentiation from the clinically-validated CD200R antibody with an improved ability to modulate the CD200R pathway, a longer half-life, and a higher steady state volume of distribution.

We plan to develop ARQ-234 in atopic dermatitis, where it could be a potentially highly complementary treatment option to roflumilast cream in that indication, if approved.

We believe the acquisition of this preclinical asset is a transformative opportunity for Arcutis and, in leveraging our team's deep dermatology expertise and broad biologics experience, that our leadership and operational team will enable us to rapidly move ARQ-234 into the clinic and through the development process.

We are developing ARQ-255, an innovative topical formulation of ivarmacitinib, a potent and highly selective small molecule inhibitor of JAK1, for the treatment of alopecia areata.

Alopecia areata is an autoimmune disorder that causes the immune system to incorrectly attack the body’s own cells, specifically the hair follicles, leading to loss of hair—usually in patches—on the scalp, face, or sometimes other areas of the body.

While oral JAK inhibitors have shown symptomatic improvement in the treatment of alopecia areata and baricitinib is FDA approved for this indication, multiple topically applied JAK inhibitors have failed to demonstrate symptomatic improvement in alopecia areata.

It is our belief that this discrepancy is due to the site of inflammation driving alopecia areata, deep in the skin at the base (bulb) of the hair follicle.

While oral JAK inhibitor administration can achieve required levels of drug at the site of inflammation, conventional topical applications are unlikely to deliver concentrations of JAK inhibitors to the site of inflammation adequate to treat alopecia areata.

We have developed a unique drug delivery technology that we refer to as Deep Dermal Drug Delivery (“4D” technology), which we believe may allow us to topically deliver sufficient concentrations of ivarmactinib deep down the hair follicle to the site of inflammation, to potentially treat alopecia areata via topical administration.

Additionally, in a nonclinical study, ivarmactinib proved to be highly selective to JAK1 over JAK2.

We believe that due to its high selectivity for JAK1 over JAK2, ARQ-255 has the potential to treat inflammatory diseases without causing the hematopoietic adverse effects associated with JAK2 inhibition.

In December 2022, we announced that the first subject had been enrolled in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata.

Alopecia Areata

Alopecia Areata Background

Alopecia areata is an autoimmune condition that affects about 1 in 500 adults.

In alopecia areata, the immune system attacks the body’s own hair follicles—leading to patches of hair loss on the scalp, face, and other areas of the body.

Typically, these bald patches appear suddenly and in some patients, can involve the whole body.

Recurrence is common and most sufferers will have several episodes during their lifetimes.

A small percentage of patients have persistent hair loss even with treatment.

Alopecia areata has been shown to lead to significant psychosocial impacts in patients, negatively impacting self-esteem, body image, and/or self-confidence.

Alopecia Areata

Index to Financial Statements

Current Alopecia Areata Treatment Landscape

In addition to the oral JAK inhibitor baricitinib, which was approved in June 2022, most patients are treated with off-label steroids for alopecia areata.

• JAK inhibitor (baricitinib), approved only for severe alopecia areata and the only JAK inhibitor approved for alopecia areata, however, it carries an extensive black box warning on its label in the United States.

Topical JAK inhibitors to date have not demonstrated efficacy in alopecia areata and, other than ARQ-255, we believe that there are no other topical development programs progressing currently.

• Topical and intralesional steroids , typically topical super potent steroids or intralesional injections of triamcinolone, are often prescribed for patients suffering from alopecia areata because of the inflammatory component of the disease.

Due to the risks associated with steroid use, including atrophy and systemic exposure from intralesional injections, many physicians try to limit duration or avoid steroid therapy.

A growing body of evidence indicates that inhibition of JAK signaling in alopecia areata can effectively promote hair regrowth.

We believe ARQ-255 may present a unique opportunity to treat alopecia areata topically.

The current approved treatment option is for oral treatment of severe disease, and we believe that a substantial unmet medical need remains for patients with mild and moderate disease states.

In addition, the safety profile of oral baricitinib presents an opportunity for treatment in severe patients who may need to limit the chronic exposure to systemic JAK inhibition and potential risks of cancer, infection, and other identified risks.

ARQ-255 Clinical Development

Alopecia Areata

ARQ-255-126 Study (Phase 1b Study)

In December 2022, we announced that the first subject had been enrolled in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata.

The Phase 1b study is a vehicle-controlled, double-blind, multi-center study designed to evaluate the safety, tolerability, and pharmacokinetics of treatment with ARQ-255 topical suspension 3% or vehicle in healthy adult subjects and individuals with patchy alopecia areata.

ARQ-252 is an alternative topical cream formulation of ivarmacitinib that we are developing for chronic hand eczema and vitiligo.

As the only JAK1-selective topical in development, we believe that ARQ-252 could offer a best-in-class topical JAK inhibitor, with a more favorable safety and tolerability profile than other topical JAK inhibitors due to its selectivity to JAK1 over JAK2, robust symptomatic improvement due to its high potency against JAK1, and a convenient and patient-friendly cream formulation.

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

In December 2019, we exercised our exclusive option under our Hengrui License Agreement to exclusively license the active pharmaceutical ingredient in ARQ-252 for all topical dermatological uses in the United States, Canada, Europe, and Japan.

Jiangsu Hengrui Medicine Co., Ltd.

(Hengrui) is developing SHR-0302, the active ingredient in ARQ-252, for the oral treatment of various inflammatory and immunological disorders, including rheumatoid arthritis, Crohn’s disease, and ulcerative colitis, and has completed a Phase 2b study in rheumatoid arthritis.

Under our agreement, we have the right to reference their safety data, along with the systemic toxicology data supporting their program.

Hengrui has built strong intellectual property protection around the active ingredient in ARQ-252, and holds U.S.

composition of matter patents, including patents for the bisulfate form of the active ingredient that do not begin to expire until 2033.

We believe there is the potential for additional intellectual property protection of ARQ-252 through possible future formulation and other patents.

The ARQ-255 formulation, a topical suspension using our 4D technology, is separate and distinct from the ARQ-252 cream formulation, and thus there are no implications to ARQ-255 from ARQ-252.

Chronic Hand Eczema

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There are currently no FDA-approved treatments specifically for the indication of hand eczema.

However, LEO Pharma has demonstrated proof of concept for their topical JAK inhibitor, delgocitinib, in Phase 2 studies.

However, LEO Pharma has reported positive Phase 3 study results for their topical JAK inhibitor, delgocitinib.

Physicians report that a significant percentage of patients, including up to 40% of patients with severe dyshidrotic eczema (one type of hand eczema), have an inadequate response to currently available treatments.

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As such, there is great unmet need for therapies that are more effective and less limiting than currently available treatment modalities.

ARQ-252 Clinical Development

Chronic Hand Eczema

ARQ-252-205 Study (Phase 2b Study)

In May 2021, we announced that the Phase 1/2b study of ARQ-252 in chronic hand eczema did not meet its primary endpoint of IGA clear or almost clear at week 12, with further analyses of the study pointing to inadequate local drug delivery to the skin.

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

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

ARQ-252-213 Study (Phase 2a Study)

Given the failure of the Phase 1/2b study of ARQ-252 in chronic hand eczema, and the data pointing towards inadequate drug delivery, we elected to terminate the Phase 2a clinical trial evaluating ARQ-252 as a potential treatment in 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.

Index to Financial Statements

We are also developing ARQ-255, an alternative topical formulation of ARQ-252 designed to reach deeper into the skin in order to potentially treat alopecia areata.

While oral JAK inhibitors have shown symptomatic improvement in the treatment of alopecia areata, multiple topically applied JAK inhibitors have failed to demonstrate symptomatic improvement in alopecia areata.

It is our belief that this discrepancy is due to the site of inflammation driving alopecia areata, deep in the skin at the base (bulb) of the hair follicle.

We have undertaken a formulation effort we refer to as Deep Dermal Drug Delivery (“4D” technology), that leverages some of the unique physical properties of the active pharmaceutical ingredient in ARQ-255, and which we believe may allow us to topically deliver sufficient concentrations of the drug to potentially treat alopecia areata via topical administration.

Formulation and nonclinical efforts are continuing for ARQ-255.

The biotechnology and pharmaceutical industry is highly competitive, and is characterized by rapid and significant changes, intense competition, and a bias towards proprietary products.

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Our success will be based in part on our ability to identify, develop, and commercialize a portfolio of product candidates that have a lower risk of side effects and/or provide more symptomatic improvement than competing products.

Index to Financial Statements

For psoriasis, our primary competitors include injected biologic therapies such as Humira ® , marketed by AbbVie Inc.

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non-injectable systemic therapies used to treat plaque psoriasis such as Otezla, marketed by Amgen Inc.

topical therapies such as branded and generic versions of clobetasol, such as Clobex, marketed by Galderma Laboratories, LP;

and Sotyktu ® , marketed by Bristol Myers Squibb;

topical therapies such as tapinarof, marketed by Dermavant Sciences, Inc.;

branded and generic versions of clobetasol, such as Clobex ® , marketed by Galderma Laboratories, LP;

generic versions of calcipotriene and the combination of betamethasone dipropionate/calcipotriene;

and other treatments including various lasers and ultraviolet light-based therapies.

In addition, there are several prescription product candidates under development that could potentially be used to treat psoriasis and compete with roflumilast cream, including tapinarof, under development by Dermavant Sciences, Inc.

and deucravacitinib, an oral Tyrosine kinase type 2 (Tyk2) inhibitor under development by BMS, Inc.

For atopic dermatitis, our primary competitors include topical therapies such as Eucrisa, marketed by Pfizer Inc.;

Opzelura, marketed by Incyte Corporation;

which was approved in September 2021, and generic and branded versions of low to mid-potency steroids such as hydrocortisone and betamethasone.

which was approved in September 2021, and generic and branded versions of low to mid-potency steroids such as hydrocortisone or triamcinolone.

In the moderate-to-severe setting, the injected biologic therapy Dupixent, marketed by Regeneron Pharmaceuticals, Inc;

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Non-injectable systemic therapies RINVOQ ® and CIBINQO ® were also recently approved in moderate-to-severe atopic dermatitis.

In addition, there are several prescription product candidates under development that could potentially be used to treat atopic dermatitis and compete with roflumilast cream, including but not limited to:

topical tapinarof and topical cerdulatinib, both under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.

(approved as Corectim in Japan), topical PF-06700841, topical difamilast ointment, under development by Medimetriks/Otsuka Pharma, oral PF-04965842, under development by Pfizer Inc., and injectable lebrikizumab, under development by Eli Lilly and Company.

Index to Financial Statements

topical tapinarof, under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.

(approved as Corectim in Japan), topical PF-07038124, under development by Pfizer Inc, topical difamilast ointment, under development by Medimetriks/Otsuka Pharma, injectable lebrikizumab, under development by Eli Lilly and Company, injectable rocatinlimab, under development by Amgen, and injectable amlitelimab, under development by Sanofi.

For alopecia areata, our primary competitors include topical therapies such as branded and generic versions of high potency steroids, including Clobex, marketed by Galderma Laboratories, LP;

intralesional corticosteroid injections such as branded and generic versions of triamcinolone, including Kenalog, marketed by Bristol-Myers Squib;

and systemic immunosuppressants including generic versions of systemic steroids such as prednisone, branded and generic versions of cyclosporine, including Sandimmune ® , marketed by Sandoz, and branded systemic JAK inhibitors, especially Olumiant ® (baricitinib), marketed by Eli Lilly and Company, an oral JAK inhibitor and the first FDA-approved treatment for alopecia areata.

In addition, there are several prescription product candidates under development that could potentially be used to treat alopecia areata and compete with ARQ-255, including but not limited to:

ritlecitinib, under development by Pfizer, Inc., and deuruxolitinib (CTP-543), under development by Concert Pharmaceuticals (being acquired by Sun Pharmaceuticals).

For hand eczema, our primary competitors include topical therapies such as branded and generic versions of clobetasol, such as Clobex, and generic versions of betamethasone dipropionate.

The only other prescription product candidate we are aware of under development for the treatment of hand eczema that would compete with ARQ-252 is delgocitinib, under development by LEO Pharma A/S, which showed proof of concept in a Phase 2B trial.

For vitiligo, our primary competitors include topical therapies such as generic and branded versions of calcineurin inhibitors, including Elidel ® , marketed by Bausch Health;

branded and generic versions of high potency steroids, including Clobex, marketed by Galderma Laboratories, LP;

the topical JAK inhibitor Opzelura, marketed by Incyte Corporation;

and other treatments including various lasers and ultraviolet light-based therapies.

In addition, there are several prescription product candidates under development that could potentially be used to treat vitiligo and compete with ARQ-255, including but not limited to:

topical cerdulatinib, under development by Dermavant Sciences, Inc., Opzelura, under development by Incyte Corporation, and both oral PF-06651600 and oral PF-06700841, under development by Pfizer Inc.

For alopecia areata, our primary competitors include topical therapies such as branded and generic versions of high potency steroids, including Clobex, marketed by Galderma Laboratories, LP;

intralesional corticosteroid injections such as branded and generic versions of triamcinolone, including Kenalog, marketed by Bristol-Myers Squib;

and systemic immunosuppressants including generic versions of systemic steroids such as prednisone, branded and generic versions of cyclosporine, including Sandimmune, marketed by Sandoz, and branded systemic JAK inhibitors, including Xeljanz, marketed by Pfizer, Inc..

In addition, there are several prescription product candidates under development that could potentially be used to treat alopecia areata and compete with ARQ-255, including but not limited to:

PF-6700841 and PF-06651600, under development by Pfizer, Inc., CTP-543, under development by Concert Pharmaceuticals, and baricitinib, under development by Eli Lilly and Company.

oral PF-06651600 and oral PF-06700841, both under development by Pfizer Inc.

Index to Financial Statements

Commercial Operations

We intend to build our own commercial infrastructure in the United States and Canada to support the commercialization of our product candidates.

We have begun to build commercial infrastructure given that regulatory approval of our first product candidate appears reasonably likely.

We plan to build our own small specialty sales force to target dermatologists, with approximately 100 field-based staff.

We may seek partnerships that allow us to target pediatricians and primary care physicians if required to maximize the potential of our product candidates.

We have begun hiring the required sales, marketing, access and reimbursement, sales support, and distribution capabilities to prepare for commercialization.

To develop the required commercial infrastructure, we will have to invest substantial financial and management resources, some of which will be committed prior to any confirmation that our product candidates will be approved, and we could invest resources and then later learn that a particular product candidate is not being approved.

We intend to commercialize ZORYVE and our other product candidates ourselves in the United States and Canada within the dermatology specialty.

In the United States, we have completed the build-out of our commercial organization, including marketing, market access, sales and marketing operations, and professional relations.

We have also built our own focused specialty sales force to target dermatologists in the United States.

We may seek partnerships that allow us to target other physicians, especially pediatricians, allergists, and primary care physicians in the United States, if required to maximize the potential of our product candidates.

In Canada, we have begun building the limited infrastructure that we believe is required to support our potential first commercial launch in Canada in 2023.

We may also seek other partners to help us access other geographic markets.

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Patent term is based on the filing or grant date of the patent, as well as the governing law of the country in which the patent is obtained.

In the United States, some pharmaceutical patents are also eligible for Patent Term Extension, or PTE, which can extend exclusivity for up to 5 additional years under certain conditions.

In the United States, some pharmaceutical patents are also eligible for Patent Term Extension, or PTE, which can extend exclusivity for up to five additional years under certain conditions.

The protection provided by a patent varies from country to country, and is dependent on the type of patent granted, the scope of the patent claims, and the legal remedies available in a given country.

Index to Financial Statements

As of February 28, 2023, we own or have an exclusive license to 15 issued U.S.

patents and 25 issued foreign patents, which include granted European patent rights that have been validated in various European Union (EU) member states, and 18 pending U.S.

patent applications, 43 pending foreign patent applications and two applications filed under the Patent Cooperation Treaty.

patent applications, 98 pending foreign patent applications, including 11 applications filed under the Patent Cooperation Treaty.

Of these patents and patent applications:

• Roflumilast cream & roflumilast foam :

As of February 22, 2022, we own seven issued U.S.

patents, one issued Canadian patent, one issued Japanese patent, one issued Chinese patent, one issued Hong Kong patent, seven pending U.S.

patent applications, and 43 pending foreign applications (two in Canada;

three each in Hong Kong, Japan, Mexico, New Zealand, India, Australia, Europe, Israel, Brazil, China, Korea and Eurasia;

and five under the Patent Cooperation Treaty), relating to roflumilast cream and roflumilast foam.

As of February 28, 2023, we own eight issued U.S.

patents, two issued Canadian patents, two issued Japanese patents, one issued Chinese patent, one issued Hong Kong patent, one issued Eurasian patent, one issued Indian patent, 12 pending U.S.

patent applications, and 71 pending foreign applications (five in Canada, five in Hong Kong, seven in Japan, six in Mexico, six in New Zealand, three in India, five in Australia, six in Europe, five in Israel, five in Brazil, six in China, five in Korea and two in Eurasia, and five under the Patent Cooperation Treaty), relating to roflumilast cream and roflumilast foam.

The issued U.S.

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Our pending patents relating to roflumilast cream and roflumilast foam contain claims directed to, among other things, other aspects of our roflumilast formulations, as well as unique pharmacokinetic aspects of topical roflumilast.

Index to Financial Statements

• ARQ-252 & ARQ-255 :

As of February 28, 2023, we have an exclusive license from Hengrui to six issued U.S.

patents, five issued Japanese patents, and five issued EU patents (validated in a number of EU member states, including for certain applications, Austria, Belgium, Bulgaria, Croatia, the Czech Republic, Estonia, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lithuania, Luxemburg, Monaco, Norway, Poland, Portugal, Romania, San Marino, Serbia, Slovenia, Slovakia, Spain, Sweden, Switzerland, Turkey, and the United Kingdom), one pending U.S.

patent application, three pending Japanese patent applications, and two pending EU patent applications relating to SHR0302.

These patents and patent applications contain claims directed towards the composition of matter of the SHR0302 compound and bisulfate and crystalline forms thereof, pharmaceutical compositions and treatment methods.

The issued patents and pending applications, if issued, relating to SHR0302 will not begin to expire until 2033.

We have filed three pending U.S.

patent applications and three patent applications under the Patent Cooperation Treaty relating to, among other things, SHR0302 formulations and methods of treatment.

These patents and patent applications contain claims directed towards the composition of matter of the ivarmacitinib compound and bisulfate and crystalline forms thereof, pharmaceutical compositions and treatment methods.

The issued patents and pending applications, if issued, relating to ivarmacitinib will not begin to expire until December 2032.

We have filed four pending U.S.

patent applications and 15 pending foreign patent applications (one in each of Australia, Brazil, Canada, China, Europe, Israel, India, Japan, Korea, Mexico, Singapore, and New Zealand and three under the Patent Cooperation Treaty) relating to, among other things, ivarmacitinib formulations and methods of treatment.

We anticipate filing additional patent applications directed towards formulations, methods and other aspects of our technology relating to ARQ-252 and ARQ-255 which we may develop in the future.

• ARQ-234 and other CD200 mutant proteins :

As of February 28, 2023, we own one issued U.S.

patent, one issued Australian patent, one issued Chinese patent, one allowed Eurasian patent, one issued Israeli patent, one issued Japanese patent, one issued Mexican patent, one issued South Korean patent, one issued South African patent, and 9 pending foreign applications (one each in Brazil, Canada, Europe, Hong Kong, India, Korea, New Zealand, Singapore;

and one under the Patent Cooperation Treaty), relating to ARQ-234 and other CD200 mutant proteins.

Obtaining patent protection is not the only method that we employ to protect our propriety rights.

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We also require any third-party that may receive our confidential information or materials to enter into confidentiality agreements prior to receipt of that information or material.

Index to Financial Statements

Exclusive License and Option Agreements

In July 2018, we entered into an exclusive license agreement, or the AstraZeneca License Agreement, with AstraZeneca, pursuant to which we obtained a worldwide exclusive license, with the right to sublicense through multiple tiers, under certain AstraZeneca-controlled patent rights, know-how and regulatory documentation, to research, develop, manufacture, commercialize, and otherwise exploit products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, the AZ-Licensed Products, for all diagnostic, prophylactic, and therapeutic uses for human dermatological indications, or the Dermatology Field.

We intend to develop topical formulations of roflumilast for the treatment of psoriasis and atopic dermatitis, as well as other dermatological conditions.

Under this agreement, we have sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at our expense, and we shall use commercially reasonable efforts to develop, obtain, and maintain regulatory approvals for, and commercialize the AZ-Licensed Products in the Dermatology Field in each of the United States, Italy, Spain, Germany, the United Kingdom, France, China, and Japan.

Pursuant to the agreement, AstraZeneca provided us with certain quantities of roflumilast at a negotiated price for development purposes.

We paid AstraZeneca an upfront non-refundable cash payment of $1.0 million and issued 484,388 shares of our Series B convertible preferred stock, valued at $3.0 million on the date of the AstraZeneca License Agreement.

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.

We have agreed to make additional cash payments to AstraZeneca of up to an aggregate of $12.5 million upon the achievement of specific regulatory approval milestones with respect to the AZ-Licensed Products, which includes $7.5 million upon FDA approval of our first product, and payments up to an additional aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones.

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 a 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.

We also paid AstraZeneca $7.5 million upon ZORYVE's FDA approval in plaque psoriasis and 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 be come payable when we achieve $100 million in worldwide sales.

Index to Financial Statements

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.

We began making quarterly royalty payments in 2022.

The agreement continues in effect until the expiration of all royalty obligations as described above, unless earlier terminated:

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Jiangsu Hengrui Medicine Co., Ltd

In January 2018, we entered into an exclusive option and license agreement, or the Hengrui License Agreement, with Jiangsu Hengrui Medicine Co., Ltd, or 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 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions, or the Field, in the United States, Japan, and the EU (including for clarity the United Kingdom), or the Territory.

In December 2019, we exercised our exclusive option, and also contemporaneously amended the agreement to expand the territory to additionally include Canada, and therefore now have a license from Hengrui under certain patent rights and know-how controlled by Hengrui to research, develop and commercialize products containing SHR0302 in the Field in the Territory.

Such license is sublicensable through multiple tiers, exclusive as to the patent rights licensed from Hengrui and nonexclusive with respect to the know-how licensed from Hengrui, and does not extend to patent rights for improvements to SHR0302 which Hengrui may come to control in the future unless otherwise mutually agreed by the parties.

In January 2018, we entered into an exclusive option and license agreement, or the Hengrui License Agreement, with Jiangsu Hengrui Medicine Co., Ltd, or 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 ivarmacitinib, a potent and selective JAK1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions, or the Field, in the United States, Japan, and the EU (including for clarity the United Kingdom), or the Territory.

Such license is sublicensable through multiple tiers, exclusive as to the patent rights licensed from Hengrui and nonexclusive with respect to the know-how licensed from Hengrui, and does not extend to patent rights for improvements to ivarmacitinib which Hengrui may come to control in the future unless otherwise mutually agreed by the parties.

In addition, we have sole responsibility for development, regulatory, marketing and commercialization activities to be conducted for the licensed products in the Field and in the Territory, at our sole cost and discretion, and shall use commercially reasonable efforts to (1) develop at least one licensed product and to (2) commercialize the licensed products following regulatory approval thereof.

Pursuant to the Hengrui License Agreement, a joint coordination committee reviews the progress of development and commercialization of each parties’ products containing SHR0302 in their respective territories and fields.

Pursuant to the Hengrui License Agreement, a joint coordination committee reviews the progress of development and commercialization of each parties’ products containing ivarmacitinib in their respective territories and fields.

During the term of the Hengrui License Agreement, if we acquire or develop certain JAK inhibitor products that are not controlled by Hengrui, or Competing Products, we must negotiate in good faith with Hengrui whether to terminate the agreement or license to Hengrui the right to develop and commercialize such Competing Product in China.

During the term of the Hengrui License Agreement, Hengrui will not develop or commercialize SHR0302 or any licensed product in the Field in the Territory.

Additionally, if Hengrui decides to develop or commercialize a non-topical formulation of SHR0302 for the treatment of certain dermatologic indications in the Territory, we have the first right to negotiate a co-development and/or co-commercialization agreement with Hengrui for the same.

We also have the right of first refusal if Hengrui decides to out-license a non-topical formulation of SHR0302 for the treatment of certain dermatologic indications in the Territory to a third-party during such period.

During the term of the Hengrui License Agreement, Hengrui will not develop or commercialize ivarmacitinib or any licensed product in the Field in the Territory.

Additionally, if Hengrui decides to develop or commercialize a non-topical formulation of ivarmacitinib for the treatment of certain dermatologic indications in the Territory, we have the first right to negotiate a co-development and/or co-commercialization agreement with Hengrui for the same.

We also have the right of first refusal if Hengrui decides to out-license a non-topical formulation of ivarmacitinib for the treatment of certain dermatologic indications in the Territory to a third-party during such period.

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

We also made a $1.5 million cash payment in connection with the exercise of our exclusive option.

In addition, we have agreed to make cash payments of up to an aggregate of $20.5 million upon our achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional $200.0 million in sales-based milestones based on achieving certain aggregate annual net sales volumes with respect to a licensed product.

In addition, we have agreed to make cash payments of up to an aggregate of $20.5 million upon our achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $200.0 million in sales-based milestones based on achieving certain aggregate annual net sales volumes with respect to a licensed product.

With respect to any products we commercialize under the agreement, we will pay tiered royalties to Hengrui on net sales of each licensed product by us, or our affiliates, or our sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions.

We are obligated to pay royalties until the later of (1) the expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.

Additionally, we are obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income we receive from sublicensees of our rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance.

Index to Financial Statements

licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.

The agreement continues in effect until the expiration of our obligation to pay royalties as described above, unless earlier terminated in accordance with the following:

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and (2) by us for convenience upon 90 days prior written notice to Hengrui and having discussed and consulted any potential cause or concern with Hengrui in good faith.

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 consolidated financial statements for additional information.

Government Regulation

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• FDA review and approval of the NDA to permit commercial marketing of the product for particular indications for use in the United States.

Pharmaceutical product development for a new product or certain changes to an approved product in the United States typically involves nonclinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought.

Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.

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must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought.

Nonclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal studies to assess the characteristics and potential safety and activity of the product.

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Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger Phase 3 clinical trials.

The product candidate is administered to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites.

These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval.

The product candidate is administered to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety,

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generally at multiple geographically dispersed clinical trial sites.

These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval.

In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information about the product.

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Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP requirements.

Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured.

The FDA will not approve the product unless it determines the facility is compliant with cGMP requirements and adequate to assure consistent production of the product within required specifications.

After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter (CRL).

Additionally, the FDA will generally inspect the facility or the facilities at which the drug is manufactured to ensure the facility is compliant with cGMP requirements and adequate to assure consistent production of the product within required specifications.

Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCPs.

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After the FDA evaluates the NDA and conducts any necessary inspections, it will issue either an approval letter or a complete response letter (CRL).

An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications.

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If regulatory approval of a product is granted, such approval will be granted for particular indications and may include limitations on the indicated uses for which such product may be marketed.

For example, as a condition of approving an NDA, the FDA may require a risk evaluation and mitigation strategy (REMS) to help ensure that the

Index to Financial Statements

benefits of the drug outweigh the potential risks.

For example, as a condition of approving an NDA, the FDA may require a risk evaluation and mitigation strategy (REMS) to help ensure that the benefits of the drug outweigh the potential risks.

A REMS is a safety strategy to manage a known or potential serious risk associated with a medicine and to enable patients to have continued access to such medicine by managing its safe use, and can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU.

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The sponsor of a Fast Track product candidate has opportunities for more frequent interactions with the applicable FDA review team during development and, once an NDA is submitted, the product candidate may be eligible for priority review.

A Fast Track product candidate may also be eligible for rolling review, where the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.

A Fast Track product candidate may

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also be eligible for rolling review, where the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.

A product candidate intended to treat a serious or life-threatening disease or condition may also be eligible for Breakthrough Therapy designation to expedite its development and review.

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The designation includes all of the Fast Track program features, as well as more intensive FDA interaction and guidance beginning as early as Phase 1 and an organizational commitment to expedite the development and review of the product candidate, including involvement of senior managers.

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Any marketing application for a drug submitted to the FDA for approval, including a product candidate with a Fast Track designation and/or Breakthrough Therapy designation, may be eligible for other types of FDA programs intended to expedite the FDA review and approval process, such as priority review and accelerated approval.

A product candidate is eligible for priority review if it is designed to treat a serious or life-threatening disease or condition, and if approved, would provide a significant improvement in safety or effectiveness compared to available alternatives for such disease or condition.

An NDA for a product candidate is eligible for priority review if the product candidate is designed to treat a serious or life-threatening disease or condition, and if approved, would provide a significant improvement in safety or effectiveness compared to available alternatives for such disease or condition.

For new-molecular-entity NDAs, priority review designation means the FDA’s goal is to take action on the marketing application within six months of the 60-day filing date.

Additionally, product candidates studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments.

As a condition of accelerated approval, the FDA will generally require the sponsor to perform adequate and well-controlled post-marketing clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit.

Products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required post-marketing studies in a timely manner or if such studies fail to verify the predicted clinical benefit.

As a condition of accelerated approval, the FDA will generally require the sponsor to perform adequate and well-controlled confirmatory clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit.

Products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required confirmatory studies in a timely manner or if such studies fail to verify the predicted clinical benefit.

In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.

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Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.

A designated orphan drug many not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation.

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A designated orphan drug many not receive orphan drug exclusivity if it is approved for a use that is broader than the disease or condition for which it received orphan designation.

In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or, as noted above, if a second applicant demonstrates that its product is clinically superior to the approved product with orphan exclusivity or the manufacturer of the approved product is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

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There also are continuing, annual program fee requirements for any marketed products.

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Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA.

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federal Anti-Kickback Statute can serve as a basis for liability under the federal False Claims Act.

The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

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Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payor knows or should know is likely to influence the beneficiary to order a receive a reimbursable item or service from a particular supplier, and the additional federal criminal statutes created by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) which prohibits, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services.

Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payer knows or should know is likely to influence the beneficiary to order a receive a reimbursable item or service from a particular supplier, and the additional federal criminal statutes created by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) which prohibits, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services.

Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to commit a violation.

In addition, HIPAA, as amended by the Health Information Technology for Clinical Health Act of 2009 (HITECH), and their respective implementing regulations, impose obligations on certain healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates that perform certain services involving the storage, use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information, and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information.

Entities that are found to be in violation of HIPAA, as the result of a breach of unsecured PHI, a complaint about privacy practices, or an audit by HHS, may be subject to significant civil, criminal, and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.

In addition, many state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect.

Further, the Physician Payments Sunshine Act requires certain manufacturers of prescription drugs to collect and report information on certain payments or transfers of value to physicians (defined broadly to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners (physician assistants, nurse practitioners or clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants and certified nurse-midwives) and teaching hospitals, as well as investment interests held by physicians and their immediate family members.

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Any action for an alleged or suspected violation can cause a drug company to incur significant legal expenses and divert management’s attention from the operation of the business, even if such action is successfully defended.

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Coverage and Reimbursement

Formulary Coverage and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any new therapeutic product candidate.

Sales in the United States will depend in part on the availability of sufficient coverage and adequate reimbursement from third-party payors, which include government health programs such as Medicare, Medicaid, TRICARE, and the Veterans Administration, as well as managed care organizations and private health insurers.

Prices at which reimbursement for therapeutic product candidates may be sought can be subject to challenge, reduction, or denial by payors.

Sales in the United States will depend in part on the availability of sufficient formulary coverage and adequate reimbursement from third-party managed care organizations and private health insurers and government health payers such as Medicare, Medicaid, TRICARE, and the Veterans Administration.

The ability for manufacturers to secure coverage for therapeutic product candidates can be subject to significant formulary restrictions or denial by payers.

The regulations that govern coverage, pricing, and reimbursement for new drugs and therapeutic biologics vary widely from country to country.

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A drug company’s ability to commercialize any products successfully will also depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government authorities, private health insurers, and other organizations.

Even if one or more products are successfully brought to the market, these products may not be considered cost-effective, and the amount reimbursed for such products may be insufficient to allow them to be sold on a competitive basis.

Increasingly, third-party payors who reimburse patients or healthcare providers, such as government and private insurance plans, are requiring that drug companies provide them with predetermined discounts from list prices, and are seeking to reduce the prices charged or the amounts reimbursed for biopharmaceutical products.

The process for determining whether a payor will provide coverage for a product is typically separate from the process for setting the reimbursement rate that the payor will pay for the product.

A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be available.

Significant delays can occur in obtaining reimbursement for newly-approved drugs or therapeutic biologics, and coverage may be more limited than the purposes for which the drug or therapeutic biologic is approved by the FDA or similar foreign regulatory authorities.

Even if one or more products are

Index to Financial Statements

successfully brought to the market, these products may not be considered cost-effective, and the amount reimbursed for such products may be insufficient to allow them to be sold on a competitive basis.

Increasingly, third-party payers who reimburse patients or healthcare providers, such as government and private insurers, are requiring that drug companies provide them rebates off list prices, and are seeking to reduce their prices to secure coverage.

A payer’s decision to provide coverage for a product does not imply that an adequate reimbursement rate or formulary position will be available.

Delays can occur in obtaining reimbursement for newly-approved drugs or therapeutic biologics, and coverage may be more limited than the purposes for which the drug or therapeutic biologic is approved by the FDA or similar foreign regulatory authorities.

Moreover, eligibility for reimbursement does not imply that any drug or therapeutic biologic will be reimbursed in all cases or at a rate that covers a drug company’s costs, including research, development, manufacture, sale, and distribution.

Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy.

In order to obtain coverage and reimbursement for any product that might be approved for marketing, expensive studies in order to demonstrate the medical necessity and cost-effectiveness of any products, which would be in addition to the costs expended to obtain regulatory approvals, may need to be conducted.

Third-party payors may not consider products to be medically necessary or cost-effective compared to other available therapies, or the rebate percentages required to secure favorable coverage may not yield an adequate margin over cost or may not enable maintenance of price levels sufficient to realize an appropriate return on a drug company’s investment in drug development.

Interim reimbursement levels for new drugs, if applicable, may also be insufficient to cover a drug company’s costs and may not be made permanent.

Reimbursement rates may be based on payments allowed for lower cost drugs or therapeutic biologics that are already reimbursed, may be incorporated into existing payments for other services, and may reflect budgetary constraints or imperfections in Medicare data.

Net prices for drugs or therapeutic biologics may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs or therapeutic biologics from countries where they may be sold at lower prices than in the United States.

Third-party payers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of products, in addition to their safety and efficacy.

In order to obtain coverage for any product that might be approved for marketing, expensive studies may be required in order to demonstrate the medical necessity and cost-effectiveness of any products, which would be in addition to the costs expended to obtain regulatory approvals.

Third-party payers may not consider products to be medically necessary or cost-effective compared to other available therapies, or the rebate percentages required to secure favorable coverage may not yield an adequate margin over cost or may not enable maintenance of price levels sufficient to realize an appropriate return on a drug company’s investment in drug development.

Net prices for drugs or therapeutic biologics may be reduced by mandatory discounts or rebates required by government healthcare programs or private payers and by any future relaxation of laws that presently restrict imports of drugs or therapeutic biologics from countries where they may be sold at lower prices than in the United States.

Further, no uniform policy for coverage and reimbursement exists in the United States.

Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations.

Therefore, coverage and reimbursement can differ significantly from payor to payor.

Third-party payers often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations.

Therefore, coverage and reimbursement can differ significantly from payer to payer.

Index to Financial Statements

Healthcare Reform

In the United States there have been, and continue to be, proposals by the federal government, state governments, regulators, and third-party payors to control or manage the increased costs of health care and, more generally, to reform the U.S.

In the United States there have been, and continue to be, proposals by the federal government, state governments, regulators, and third-party payers to control or manage the increased costs of health care and, more generally, to reform the U.S.

healthcare system.

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pharmaceutical industry.

The ACA, among other things, (i) subjected therapeutic biologics to potential competition by lower-cost biosimilars by creating a licensure framework for follow-on biologic products, (ii) established a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs and therapeutic biologics that are inhaled, infused, instilled, implanted or injected, (iii) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, (iv) established annual nondeductible fees and taxes on manufacturers of certain branded prescription drugs and therapeutic biologics, apportioned among these entities according to their market share in certain government healthcare programs, (v) established a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs and therapeutic biologics to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs and therapeutic biologics to be covered under Medicare Part D, which has since been increased to 70%, (vi) expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability, (vii) expanded the entities eligible for discounts under the Public Health program, (viii) created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research, and (ix) established a Center for Medicare Innovation at Centers for Medicare and Medicaid Services (CMS) to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

The ACA, among other things, (i) subjected therapeutic biologics to potential competition by lower-cost biosimilars by creating a licensure framework for follow-on biologic products, (ii) established a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs and therapeutic biologics that are inhaled, infused, instilled, implanted or injected, (iii) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, (iv) established annual nondeductible fees and taxes on manufacturers of certain branded prescription drugs and therapeutic biologics, apportioned among these entities according to their market share in certain government healthcare programs, (v) established a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs and therapeutic biologics to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs and therapeutic biologics to be covered under Medicare Part D, which has since been increased to 70%, (vi) expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability, (vii) expanded the entities eligible for discounts under the Public Health program, (viii) created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research, and (ix) established a Center for Medicare and Medicaid Innovation at Centers for Medicare and Medicaid Services (CMS) to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Since its enactment, there have been judicial, executive, and Congressional challenges to certain aspects of the ACA.

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In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted to reduce healthcare expenditures.

On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, beginning January 1, 2024.

federal government agencies also currently face potentially significant spending reductions, which may further impact healthcare expenditures.

On August 2, 2011, the Budget Control Act of 2011, among other things, included aggregate reductions of Medicare payments to providers of 2% per fiscal year.

These reductions went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken.

On August 2, 2011, the Budget Control Act of 2011, among other things, included aggregate reductions of Medicare payments to providers, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2032, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken.

Moreover, on January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

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Recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products.

Although a number of these, and other potential, proposals will require authorization through additional legislation to become effective, the probability of success of these and any other Trump administration reform initiatives is uncertain, particularly in light of the new Biden administration.

On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was into law.

Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025).

The IRA permits the Secretary of the Department of Health and Human Services to implement many of these provisions through guidance, as opposed to regulation, for the initial years.

For that and other reasons, it is currently unclear how the IRA will be effectuated.

At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

We anticipate that these new laws will result in additional downward pressure on coverage and the price that we receive for any approved product, and could seriously harm our business.

Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors.

Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payers.

The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.

In addition, it is possible that there will be further legislation or regulation that could harm our business, financial condition, and results of operations.

Further, it is possible that additional governmental action is taken in response to the evolving effects of the COVID-19 pandemic.

Further, it is possible that additional governmental action is taken in response to the effects of the COVID-19 pandemic.

Additionally, health reform initiatives may arise in the future, particularly as a result of the 2020 presidential election.

Data Privacy and Security

Numerous state, federal and foreign laws, regulations and standards govern the collection, use, access to, confidentiality and security of health-related and other personal information, and could apply now or in the future to our operations or the operations of our partners.

In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy and security laws and consumer protection laws and regulations govern the collection, use, disclosure, and protection of health-related and other personal information.

In addition, certain foreign laws govern the privacy and security of personal data, including health-related data.

Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data.

Human Capital Resources and Employees

As of December 31, 2022, we had 268 full-time employees.

Of these full-time employees, 25 have an M.D., a Ph.D.

D and 3 have been Nurse Practitioners or Physician Assistants.

Of these full-time employees, four have an M.D., four have been Nurse Practitioners or Physician Assistants, and 10% have a PhD or Pharm.

From time to time, we also retain independent contractors to support our organization.

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We view our operations and manage our business as one reportable segment.

See Note 1 in the Notes to Financial Statements included in this Annual Report on Form 10-K.

See Note 1 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Additional information required by this item is incorporated herein by reference to Part II, Item 6, “Selected Financial Data.”

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About Arcutis Biotherapeutics

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The information found on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report on Form 10-K.

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Available Information

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The information found on or accessible through our website is not incorporated into, and does not form a part of, this Annual Report on Form 10-K.

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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-K

Item 1. Business