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Funding Overview
On the end of January this 12 months, I shared a phrase on Seeking Alpha masking Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT). This could be a Westlake Village, California-based biotech that markets and sells two dermatological merchandise — ZORYVE® (roflumilast) cream 0.3%, and ZORYVE® (roflumilast) topical foam 0.3%.
Roflumilast is — in line with Arcutis’ Q2 2024 quarterly report / 10Q submission:
a extraordinarily potent and selective phosphodiesterase-4 (“PDE4”) inhibitor. PDE4 is a longtime natural aim in dermatology, with numerous PDE4 inhibitors accredited by the FDA for the remedy of dermatological conditions.
Zoryve cream was accredited to take care of plaque psoriasis in July 2022, and likewise to take care of psoriasis in youngsters ages 6-11 in October 2023. The froth product was accredited to take care of seborrheic dermatitis in victims aged 9 years and above in December 2023. In July this 12 months, the cream product secured its third essential approval, for the remedy of atopic dermatitis (“AD”) in adults and kids aged 6 years and above.
Arcutis completed its IPO in January 2020, elevating ~$160m by means of the issuance of 9.375m shares priced at $17 per share. On the time of this phrase, the company’s traded share value is $8.3, which suggests shares are down ~50% since IPO.
The situation was significantly worse on the time of my closing phrase, nonetheless, with stock valued <$6 per share. My thesis was that sluggish product sales of Zoryve merchandise had been weighing carefully on the company valuation — I well-known that:
All through the first three quarters of 2023, web revenues from Zoryve amounted to $2.8m, $4.8m, and $8.1m, whereas Arcutis’ web losses amounted to $(80.1m), $(71m), and $(44.8m). Collected deficit as of Q3 2023 amounted to $(916m).
Most likely readers would agree these figures make for sturdy finding out, nonetheless I gave Arcutis stock a “Buy” rating in January, arguing that there have been two strategies of making an attempt on the agency’s industrial / financial predicament. Each the company was “working out of steam” and struggling to compete in worthwhile, nonetheless crowded remedy markets, or that:
we would put Arcutis underperformance with regard to Zoryve revenues all the best way right down to inexperience on the market place, sluggish uptake amongst physicians, and a smaller addressable market throughout the plaque psoriasis market.
Each of these points might very effectively be solved in 2024, as administration good factors further notion into market dynamics – pricing has already emerged as a key differentiator between merchandise – current physicians proceed to prescribe and persuade colleagues to prescribe – and the market various converts proper right into a multi-billion buck one, resulting from further approvals, in AD primarily.
Clearly, the latter thesis proved applicable, as shares have risen in value by >40% since my phrase, nonetheless revisiting the thesis virtually 8 months on, does it keep professional?
On this submit, I’ll reply this question by analyzing the company’s present effectivity, and discussing the latest market dynamics, and try to current some concepts as to the place I contemplate the share value may be heading subsequent.
Let’s begin by having a look at Q2 2024 earnings, launched on August 14th.
Arcutis — Q2 2024 Earnings Consider
In Q2 2024, Arcutis reported revenues of $30.9m — up a formidable 547% year-on-year. Zoryve foam earned $13.6m of revenues, and Zoryve cream $17.3m of revenues. Internet losses moreover narrowed significantly, to $(52.3m) for the quarter, and $(87.4m) for the half 12 months, versus a quarterly lack of $(82m) for the same interval closing 12 months, and a half-yearly lack of $(143m).
On the end of January, Arcutis filed for a $300m mixed securities’ shelf, elevating $150m on the end of February, at $9.5 per share. The company’s stock had been making sturdy good factors all by means of January and February, rising from <$3 per share to ~$12 per share by means of the interval. It’s perhaps buoyed by the froth approval and cream label expansions in December 2023, and optimistic analyst sentiment, triggered by increased than anticipated adoption developments.
Arcutis reported $363m of cash as of the tip of Q2 2024, versus $203.8m of long-term debt, which it was able to renegotiate phrases on all through Q2. The company’s new Chief Financial Officer, David Topper, who joined in April from Inmagene Bio, talked about the modifications as follows by means of the Q2 earnings identify:
The revised deal, which turns into environment friendly initially of October of this 12 months, provides fairly a couple of essential enhancements, along with an extended maturity to eight/1/29, a decrease throughout the price of curiosity of 150 basis components, the pliability to repay as a lot as $100 million throughout the fourth quarter this 12 months, together with the facility to redraw that money anytime via the first half of 2026, thereby saving us considerable curiosity expense. Now we have moreover deferred our 6.95% exit fee on the redrawn $100 million to the August 2029 maturity date and take away restrictions on asset purchases.
All in all, then, it was a steady quarter for Arcutis, with earnings rising, losses narrowing, new merchandise performing strongly, and debt restructured to make it a lot much less onerous. The company was moreover able to announce a strategic collaboration and licensing settlement for roflumilast merchandise with Japanese agency Sato Pharmaceutical. Based mostly on a press launch:
Beneath the phrases of the settlement, Arcutis will acquire an upfront charge of $25 million, and possibly an additional $40 million if positive regulatory and product sales milestones are achieved. Arcutis could be eligible to acquire tiered, low double-digit share royalties.
With all that talked about, since reaching a share value extreme of $12.5 in April, merely sooner than the mixed shelf announcement, Arcutis stock has retreated in value to $8.4 per share on the time of writing. This supplies the company a market cap valuation of $983m, and there are some uncertainties for consumers to consider.
No 2024 Steering, Ongoing Losses, Rising Opponents
Administration has declined to supply any full-year 2024 steering, and the enterprise stays unprofitable — on the current cost of losses, cash might very effectively be close to exhausted by the tip of subsequent 12 months, necessitating one different dilutive fundraising. Addressing profitability on the Q2 earnings identify, CFO topper suggested analysts:
I’m not going to the touch upon timing to profitability or breakeven, nonetheless what I’ll say, clearly, in case you break SG&A into S on the one hand, and G&A then once more, selling clearly, is always going to be pretty intently correlated with earnings. So the easiest way you get to interrupt even in one of these enterprise, clearly is through economies of scale on the G&A devices, correct?
Briefly, the additional product product sales Arcutis makes, the earlier it’s going to switch to profitability, which is encouraging, although the CFO moreover instructed the path to profitability is just not going to basically be so linear:
Now, clearly, circumstances can change whilst you launch merchandise like AD, for example, or launch a PCP program, you do incur some startup costs and points like that.
Analysts at Mizuho have beforehand instructed that Zoryve would possibly acquire peak annual revenues of $1.8bn — $3.8bn by 2030, which, if true, makes a strong bull case for a corporation whose market cap valuation stays <$1bn.
Even with a relatively modest value to product sales ratio of ~3x, if Arcutis had been to fulfill Mizuho’s expectations, the company must be valued at >$6bn, supplied it was moreover to appreciate profitability sooner than the tip of the final decade.
Zoryve shouldn’t be the one topical cream obtainable to victims throughout the indications of psoriasis and atopic dermatitis, nonetheless. Incyte Firm’s (INCY) Opzelura, accredited to take care of AD, earned $338m of revenues closing 12 months, up 160% year-on-year. Roivant’s (ROIV) Vtama might need earned solely $18.4m of revenues in fiscal Q1 2025, nonetheless the agency has submitted a supplementary NDA (“sNDA”) to the FDA requesting approval throughout the greater AD indication, which is susceptible to be accredited.
With rivals intensifying in its core markets, not solely from totally different topical lotions, however moreover from the likes of Sanofi (SNY) and Regeneron’s (REGN) Dupixent – >$12bn revenues all through a selection of dermatological indications in 2023 — can Arcutis proceed to develop Zoryve’s market share?
Zoryve TRx growth (earnings presentation)
As we’re in a position to see above, prescription growth for the additional not too way back launched foam product has been spectacular, and cream prescriptions moreover proceed to develop, although there could also be some indication of growth plateauing significantly.
Wanting Ahead — New Merchandise & New Approvals Encourage, Nevertheless Share Worth Buoyancy Hangs In Stability
One essential goal for optimism that Arcutis stock can embark on one different bull run is the approval in AD secured on the end of July. AD is a double-digit billion buck market, and concurrent with the approval of Zoryve on this indication, Arcutis launched the signing of a co-promotion settlement with Kowa Prescription drugs America — in line with a press launch:
Kowa will leverage its main care product sales drive to market and promote ZORYVE (roflumilast) cream and ZORYVE (roflumilast) foam to main care practitioners and pediatricians for all FDA accredited indications.
Arcutis will hold accountability for the promoting and product sales of ZORYVE to dermatologists, totally different dermatology clinicians, and related specialists. This partnership is anticipated to develop the general addressable market for ZORYVE, providing entry to a giant portion of the 7.4 million victims dealt with exterior of dermatology workplaces.
Arcutis CEO Frank Watanabe suggested analysts on the Q2 earnings identify, in relation to the Kowa deal, that “we’d not anticipate to see important earnings contribution from these efforts until 2025.” Nonetheless, with a model new, further worthwhile market now in play, and an expert confederate added, there must be optimism throughout the kind of earnings figures that could be achieved in 2025, even when administration are reluctant to supply any steering.
Within the meantime, Arcutis’ pipeline consists of ARQ-255, a “deep-penetrating topical formulation of ivarmacitinib, a potent and intensely selective topical Janus kinase form 1 (“JAK1”) inhibitor,” indicated for alopecia areata — a Half 1b analysis is underway — whereas Arcutis 2022 acquisition of Ducentis BioTherapeutics provides the company entry to candidate ARQ-234, “a fusion protein that could be a potent and intensely selective checkpoint agonist of the CD200 Receptor (CD200R)”, moreover concentrating on the AD market.
If we consider the effectivity of Incyte’s Opzelura in 2023 – >$300m revenues — my instinct is that Arcutis will contemplate it would in all probability match or exceed that decide inside a couple of years. On account of this truth, together with in psoriasis and seborrheic dermatitis, a earnings decide of ~$500m may be achievable in 2026, I’d speculate.
For now, my suspicion is that Mizuho’s notion that Zoryve is a “blockbuster” (>$1bn revenues every year) selling product in prepared, or maybe a >$3bn every year selling product, is method too daring. Nonetheless, a $500m selling product must be ample to proceed to develop the company valuation, supplied costs and payments don’t spiral uncontrolled.
The reality that there would possibly rapidly be two totally different competing lotions all through the psoriasis and AD markets doesn’t basically suggest Zoryve’s market share shall be impacted. We’re initially of these merchandise’ industrial journeys, not the tip, and having three separate companies pushing the non-steroidal, topical cream agenda might very effectively be a bonus considerably than a hindrance.
As such, although Arcutis stock has been declining since its sensational bull run from ~$3 per share, to $12 per share in early 2023, my feeling is that Q3 and This autumn revenues figures will impress Wall Avenue. Supplied we moreover see continued movement in course of break-even, the company’s efforts shall be rewarded with further share value good factors.
I’d set an increased prohibit market cap valuation of ~$1.5bn which can very effectively be achieved by mid-2025, so the growth story for Arcutis Biotherapeutics, Inc. stock shouldn’t be explosive, in my view, nonetheless it stays tangible and achievable nonetheless.