What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-08 · 126 added, 209 removed, 165 unchanged (67% of the section changed)

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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.

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 progress towards 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 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.

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, 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 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.

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 received our first regulatory approval outside of the U.S.

in April 2023 from Health Canada for ZORYVE for the treatment of plaque psoriasis in individuals 12 years or age or older.

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

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

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

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

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

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

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.

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.

In atopic dermatitis, we are conducting or have completed three pivotal Phase 3 clinical studies:

INTEGUMENT-1 and -2 enrolled subjects 6 years of age or older and INTEGUMENT-PED is enrolling subjects between the ages of 2 and 5 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 late in the third quarter or early in the fourth quarter of 2023, based on the results of INTEGUMENT-1 and -2.

In May 2023, we announced the last subject enrolled in INTEGUMENT-PED, and we expect to provide topline data from this study in the third quarter of 2023.

We then expect to 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 6 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 announced positive topline data in June 2022 and we expect the data to be a sufficient basis for an NDA submission in the first quarter of 2023.

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

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

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

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

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

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

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

In seborrheic dermatitis, the FDA accepted our New Drug Application (NDA) for the treatment of moderate-to-severe seborrheic dermatitis in April 2023 with a target action date of December 16, 2023.

If approved, we would expect to launch roflumilast foam for the treatment of seborrheic dermatitis in the first quarter of 2024.

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

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

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

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

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

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

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

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.

As part of our continued efforts to prioritize spend on the launch of ZORYVE and the progression of the follow-on indications for topical roflumilast, we are pausing development of ARQ-252, an alternative cream formulation of ivarmacitinib for chronic hand eczema, vitiligo, and other inflammatory dermatoses.

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

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

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

On February 4, 2020, we received $167.2 million in net proceeds in connection with our IPO.

On October 6, 2020, we closed a public offering and a concurrent private placement of our common stock and received an aggregate of $128.4 million in net proceeds.

On February 5, 2021, we closed a public offering of our common stock and received an aggregate of $207.5 million in net proceeds.

In December 2021, we received $72.4 million in net proceeds under the Loan Agreement.

In March 2022, we received $14.5 million in net proceeds related to shares issued under our ATM.

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

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

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

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

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

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

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

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

Prior to 2023, we received approximately $827.2 million in net cash proceeds through equity offerings, approximately $195.2 million in net proceeds under the Loan Agreement with SLR, and $14.5 million in net proceeds related to shares issued under our ATM.

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

We have incurred net losses in each year since inception, including net losses of $80.1 million and $64.3 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, we had an accumulated deficit of $799.9 million and cash, cash equivalents, restricted cash, and marketable securities of $333.3 million.

As of March 31, 2023, we had $200.0 million outstanding under the Loan Agreement, with an additional $25.0 million in funding that may become available subject to the satisfaction of specified conditions.

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

We expect to incur significant and prioritized commercialization expenses related to the sales, marketing, manufacturing, and distribution of ZORYVE, while we focus our clinical development spend on ARQ-234 and ARQ-255 and ZORYVE label extensions, if we obtain regulatory approval for them.

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

Adequate funding may not be available to us on acceptable terms, or at all.

Any failure to obtain sufficient funds on acceptable terms as and when needed could have a material adverse effect on our business, results of operations, and financial condition.

See “Liquidity, Capital Resources, and Requirements” below and Note 1 to the condensed consolidated financial statements for additional information.

We rely on third parties in the conduct of our nonclinical studies and clinical trials and for manufacturing and supply of our product candidates.

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

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

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

COVID-19 Update

In March 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak.

COVID-19 has placed strains on the providers of healthcare services, including the sites where we conduct our clinical trials.

These strains have resulted in some clinical sites slowing or halting enrollment in clinical trials and restricting the on-site monitoring of clinical trials.

We follow FDA guidance on clinical trial conduct during the COVID-19 pandemic, including the remote monitoring of clinical data.

We are monitoring the impact COVID-19 may have on the clinical development of our product candidates, including potential delays or modifications to ongoing and planned trials.

We believe that the rapid spread of the Omicron variant in late 2021 and early 2022 has likely had a minor impact on the enrollment of our clinical trials.

Because of this likely impact, along with the inherent challenges of enrolling young children in clinical trials, we have updated our expectation for providing topline data for the INTEGUMENT-PED trial, in atopic dermatitis subjects between two and five years of age, to 2023.

We cannot, at this time, predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our ongoing and planned clinical trials and other business operations, including our commercialization activities.

There have been no disruptions in our supply chain of drug manufacturers necessary to conduct our clinical trials and, given our drug inventories, we believe that we will be able to supply the drug needs of our ongoing clinical studies and commercialization efforts.

In alignment with public health guidance designed to slow the spread of COVID-19, we implemented a remote work plan for all employees as of mid-March 2020.

With COVID-19 moving to an endemic phase, we have formally returned to our previously existing hybrid work environment consisting of both local and remote employees.

We may need to undertake additional actions that could impact our operations as required by applicable laws or regulations, or which we determine to be in the best interests of our employees.

License Agreements

License Agreements & Acquisition

AstraZeneca License Agreement

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

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

We also paid AstraZeneca $7.5 million upon ZORYVE's FDA approval in plaque psoriasis.

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

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

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

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

We began making quarterly royalty payments in the first quarter of 2023.

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

Hengrui Exclusive Option and License Agreement

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

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

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

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

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

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

Ducentis Acquisition

On September 7, 2022, we entered into a Share Purchase Agreement with Ducentis, pursuant to which we acquired all of the outstanding equity interests in Ducentis for (i) 610,258 shares of our common stock valued at approximately $12.5 million and $15.9 million in cash, inclusive of liabilities acquired, and (ii) contingent payments, the amount of which is indeterminable until achieved, which may become payable upon the achievement of certain development, regulatory, and commercial milestones.

We currently, estimate that these contingent payments may be up to an aggregate of approximately $400 million (although the actual amount may differ depending on whether the applicable milestones are achieved).

In addition, if applicable, we will make payments amounting to a mid-single-digit percentage of any annual net sales of Ducentis’s products exceeding $1.5 billion.

As of March 31, 2023, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying condensed consolidated financial statements with respect to these contingent payments.

Under the terms of the Share Purchase Agreement, we will develop and seek FDA approval of a therapeutic product containing Ducentis’s DS-234 product candidate, now ARQ-234, for an atopic dermatitis indication, and if FDA approval of ARQ-234 is obtained by us, to launch it in the United States.

Components of Our Results of Operations

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

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

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

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

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

Cost of Sales

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

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

In particular, we expect to incur substantial research and development expenses for the ongoing pediatric and open label extension Phase 3 trials of roflumilast cream for atopic dermatitis, ARQ-255 for alopecia areata, and development of ARQ-234 for atopic dermatitis.

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

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

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

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

The successful development of our product candidates is highly uncertain.

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

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

We expect our selling, general and administrative expenses to continue to increase in the future as we continue to commercialize ZORYVE and potentially other product candidates, increase our headcount, and support our operations;

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

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Interest Expense

Interest expense is related to our long term debt.

Interest expense is related to interest incurred on our long term debt.

Results of Operations

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

Comparison of the Three Months Ended March 31, 2023 and 2022

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

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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Product revenue, net

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

in August 2022.

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

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

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

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

During the three months ended March 31, 2023, we recognized $2.8 million of net product revenues related to sales of ZORYVE.

Revenues were primarily driven by end customer demand, partially offset by sales discounts, which consisted primarily of co-pay assistance discounts, managed care rebates and distribution fees.

Cost of Sales

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

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

Cost of sales of $0.8 million for the three months ended March 31, 2023 is related primarily to product costs incurred after FDA approval of ZORYVE.

Prior to the date on which the initial regulatory approval was received, costs of raw materials were recorded as research and development expense.

Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to occur over the next two years.

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

Research and Development Expenses

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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Other early stage programs 1,132 295 837 284 %

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

Indirect costs:

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Total research and development expense $ 35,345 $ 40,622 $ (5,277) (13) %

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

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

Research and development expenses decreased by $5.3 million, or 13%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The decrease was primarily due to the lower direct costs related to the topical roflumilast program of $9.0 million, partially offset by increases in compensation and personnel-related costs of $1.4 million, and an increase in other costs of $1.3 million.

The decrease in topical roflumilast program costs was primarily due to the completion of Phase 3 studies of roflumilast cream in atopic dermatitis and roflumilast foam in seborrheic dermatitis and scalp and body psoriasis, partially offset by the $3.0 million payment to the FDA for our roflumilast foam NDA submission.

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

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

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

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

Selling, General, and Administrative Expenses

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

Selling, general, and administrative expenses increased by $20.9 million, or 95%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase was primarily due to higher compensation and personnel-related expenses of $11.0 million, higher sales and marketing expenses of $7.5 million, and higher professional services of $1.6 million.

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

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

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

Other Income, Net

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

Interest Expense

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

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

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

Nine Months Ended September 30, Change

2022 2021 $ %

(in thousands)

Product revenue, net $ 725 $ — $ 725 *

Total revenues 725 — 725 *

Operating expenses:

Cost of sales 269 — 269 *

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

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

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

Loss from operations (233,203) (135,243) (97,960) 72 %

Other income (expense):

Other income, net 2,501 213 2,288 1074 %

Interest expense (8,737) — (8,737) *

Total other income (expense) (6,236) 213 $ (6,449) (3028) %

Net loss $ (239,439) $ (135,030) $ (104,409) 77 %

______________

*Not applicable

Product revenue, net

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

on August 10, 2022.

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

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

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

Cost of Sales

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

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

Research and Development Expenses

Nine Months Ended September 30, Change

2022 2021 $ %

(in thousands)

Direct external costs:

Topical roflumilast program $ 68,214 $ 53,416 $ 14,798 28 %

Topical JAK inhibitor program 2,505 8,470 (5,965) (70) %

Other early stage programs 625 434 191 44 %

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

Indirect costs:

Compensation and personnel-related 30,880 19,874 11,006 55 %

Other 16,704 10,806 5,898 55 %

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

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

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

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

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

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

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

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

Selling, General, and Administrative Expenses

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

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

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

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

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

These increases were primarily due to our commercialization efforts, including the hiring of our sales force.

Other Income, Net

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

Other income, net increased by $3.1 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to the impact of rising interest rates for the three months ended March 31, 2023.

Interest Expense

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

Interest expense increased by $5.2 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, due to an increase in our long-term debt balance and the impact of rising interest rates.

See Note 8 to the condensed consolidated financial statements for additional information.

Liquidity, Capital Resources, and Requirements

Sources of Liquidity

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

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

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

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

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

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

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

Nine Months Ended September 30,

(in thousands)

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

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

Cash provided by financing activities 300,836 209,066

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

Net Cash Used in Operating Activities

During the nine months ended September 30, 2022, net cash used in operating activities was $186.7 million, which consisted of a net loss of $239.4 million and a change in net operating assets and liabilities of $2.8 million, partially offset by net non-cash charges of $55.6 million.

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

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

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

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

Net Cash Provided by (Used in) Investing Activities

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

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

Net Cash Provided by Financing Activities

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

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

Funding Requirements

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

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

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

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

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

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

To date, our primary sources of capital have been private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020, February 2021, and August 2022, our Loan Agreement, our ATM, and revenue from the sale of our approved product.

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

As of March 31, 2023, we had cash, cash equivalents, restricted cash, and marketable securities of $333.3 million, and an accumulated deficit of $799.9 million.

We maintain cash balances with financial institutions in excess of insured limits.

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

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

If our capital resources are insufficient to satisfy our requirements, we may need to fund our operations through the sale of our equity securities, accessing or incurring additional debt, entering into licensing or collaboration agreements with partners, grants, or other sources of financing.

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

If we are unable to obtain additional funding from these or other sources when needed it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back, or stopping certain research and development programs.

If we are unable to obtain additional funding from these or other sources when needed it may be necessary to significantly reduce our current rate of spending through, among other things, reductions in staff and delaying, scaling back, or stopping certain research and development programs, nonclinical studies, clinical trials or other development activities, and commercialization efforts.

Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect.

In addition, market conditions impacting financial institutions could impact our ability to access some or all of our cash, cash equivalents and marketable securities, and we may be unable to obtain alternative funding when and as needed on acceptable terms, if at all.

We have based our projected operating requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect.

Because of the numerous risks and uncertainties associated with research, development, and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements.

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

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

• the timing, receipt, and amount of sales of any current and future products;

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

• suspensions or delays in the enrollment, issues with data collection, or changes to the number of subjects we decide to enroll in our ongoing clinical trials as a result of the COVID-19 pandemic, competing trials or otherwise;

• the scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting nonclinical studies and clinical trials, in particular our planned or ongoing clinical studies of roflumilast cream in plaque psoriasis and atopic dermatitis, roflumilast foam in seborrheic dermatitis and scalp psoriasis, ARQ-255 in alopecia areata, and our formulation and nonclinical efforts for ARQ-234;

• suspensions or delays in the enrollment or changes to the number of subjects we decide to enroll in our ongoing clinical trials;

• the number and scope of clinical programs we decide to pursue, and the number and characteristics of any product candidates we develop or acquire;

• the timing of, and the costs involved in, obtaining regulatory reviews and approvals for our product candidates;

• the cost of manufacturing any current and future products and product candidates, including any products we successfully commercialize, including costs associated with building out our supply chain;

• the cost of commercialization activities for any current and future products that are approved for sale, including marketing, sales, and distribution costs, and any discounts or rebates to channel to obtain access;

• the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates;

• the number and characteristics of any additional product candidates we develop or acquire;

• the cost of manufacturing ZORYVE or any future product candidates and any products we successfully commercialize, including costs associated with building out our supply chain;

• the cost of commercialization activities for ZORYVE or any future product candidates are approved for sale, including marketing, sales and distribution costs, and any discounts or rebates to obtain access;

• our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into;

• the costs related to milestone payments due to AstraZeneca, Hengrui, or any future collaboration or licensing partners upon the achievement of negotiated milestones;

• the costs related to milestone payments to AstraZeneca, Hengrui, or any future collaborator or licensing partner, upon the achievement of predetermined milestones;

• any product liability or other lawsuits related to our products;

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• the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio;

• costs associated with any adverse market conditions or other macroeconomic factors.

On December 22, 2021 we entered into a Loan Agreement with SLR and the lenders party thereto.

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The tranche A term loan was funded on December 22, 2021.

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

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

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

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

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

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

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

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

On March 31, 2023, the rate was 12.12%.

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

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

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

We were in compliance with all covenants under the Loan Agreement as of March 31, 2023.

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

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Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement.

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

Three Months Ended March 31,

(in thousands)

Cash used in operating activities $ (80,344) $ (56,975)

Cash provided by investing activities 107,751 15,297

Cash provided by financing activities 100 14,716

Effect of exchange rate changes on cash (52) —

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 27,455 $ (26,962)

Net Cash Used in Operating Activities

During the three months ended March 31, 2023, net cash used in operating activities was $80.3 million, which consisted of a net loss of $80.1 million and a change in net operating assets and liabilities of $9.0 million, partially offset by net non-cash charges of $8.8 million.

The net non-cash charges were primarily related to stock-based compensation expense of $9.5 million.

During the three months ended March 31, 2022, net cash used in operating activities was $57.0 million, which consisted of a net loss of $64.3 million and a change in net operating assets and liabilities of $0.4 million, partially offset by net non-cash charges of $7.8 million.

The net non-cash charges were primarily related to stock-based compensation expense of $6.5 million.

Net Cash Provided by Investing Activities

During the three months ended March 31, 2023, net cash provided by investing activities was $107.8 million, which was comprised primarily of proceeds from the maturities of marketable securities of $147.5 million, partially offset by purchases of marketable securities of $39.7 million.

During the three months ended March 31, 2022, net cash provided by investing activities was $15.3 million, which was comprised primarily of proceeds from the maturities of marketable securities of $70.9 million, partially offset by purchases of marketable securities of $55.5 million.

Net Cash Provided by Financing Activities

During the three months ended March 31, 2023, net cash provided by financing activities was $0.1 million, which related to proceeds from the issuance of common stock upon the exercise of stock options.

During the three months ended March 31, 2022, net cash provided by financing activities was $14.7 million, which was comprised primarily of the net cash proceeds received from shares sold under our ATM of $14.5 million.

Contractual Obligations and Contingent Liabilities

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

The following summarizes our significant contractual obligations as of March 31, 2023.

Facility Operating Lease

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

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

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

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

Accordingly, as of March 31, 2023, we have a letter of credit and related restricted cash account of $0.9 million.

The total commitment under the operating lease agreement is $5.5 million, including $0.7 million for the remaining nine months of 2023, $1.0 million for each of the years 2024 through 2025, $1.1 million for each of the years 2026 through 2027, and $0.6 million for the year 2028.

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

Long-Term Debt Obligations

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

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

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

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

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

As of March 31, 2023, we had $200.0 million outstanding under our Loan Agreement.

We have $25.0 million in additional funding remaining that may become available subject to the satisfaction of specified conditions.

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

The total commitment under the Loan Agreement as of March 31, 2023 is $307.7 million, including $18.8 million for the remaining nine months of 2023, $25.0 million for each of the years 2024 through 2026, and $213.9 million for 2027.

These amounts do not represent or include any future draw downs, but instead represent only the contractually obligated minimum payments of interest, principal, and loan fees related to the funding of the $75.0 million tranche A term loan on December 22, 2021 and the $125.0 million tranche B term loan on August 2, 2022.

License Agreements

The terms of certain of our license agreements require us to pay potential future milestone payments based on product development and commercial success.

License Agreements & Acquisition

The terms of certain of our license agreements and our acquisition of Ducentis require us to pay potential future milestone payments based on product development and commercial success.

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

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

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

Manufacturing Agreements

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

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

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

Firm future purchase commitments under these agreements are approximately $5.1 million within the next nine months, and approximately $0.8 million per year for 2024 and 2025.

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

Indemnification

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Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2022.

We began to sell ZORYVE in August 2022.

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

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

There were no material changes to our critical accounting policies during the three months ended March 31, 2023.

Recent Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements.

See Note 2 to our condensed consolidated financial statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis