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What changed in Arcutis Biotherapeutics, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Arcutis Biotherapeutics, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+585 added−526 removedSource: 10-K (2024-02-27) vs 10-K (2023-02-28)

Top changes in Arcutis Biotherapeutics, Inc.'s 2023 10-K

585 paragraphs added · 526 removed · 405 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

142 edited+66 added−21 removed262 unchanged
Biggest changeOur 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. 23 Table of Contents 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) relating to ivarmacitinib.
Biggest changeOur pending patents relating to roflumilast cream and roflumilast foam contain claims directed to, among other things, pharmaceutical compositions of roflumilast and diethylene glycol monoethyl ether, pharmaceutical compositions of roflumilast and cetostearyl alcohol, dicetyl phosphate, and ceteth-10 phosphate, methods of treatment using such compositions, methods of manufacturing such compositions, 26 Table of Contents Index to Financial Statements and other aspects of our roflumilast formulations, including unique pharmacokinetic aspects of topical roflumilast compositions. • ARQ-252 & ARQ-255 : As of February 27, 2024, we have an exclusive license from Hengrui to six issued U.S. patents, five issued Japanese patents, and five issued EU patents (validated in various European Patent Organisation (EPO) member states) relating to ivarmacitinib.
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).
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 cream (12 weeks in the randomized Phase 2b study and 52 weeks in the long-term safety study).
The process required by the FDA before a drug may be marketed in the United States generally involves the following: • completion of nonclinical laboratory tests, animal studies, and formulation studies in accordance with FDA’s Good Laboratory Practice (GLP) requirements and other applicable regulations; • submission to the FDA of an Investigational New Drug application (IND) which must become effective before human clinical trials may begin; • approval by an independent Institutional Review Board (IRB) or ethics committee at each clinical site before each trial may be initiated; • performance of adequate and well-controlled human clinical trials in accordance with good clinical practices (GCP) to establish the safety and efficacy of the proposed drug for its intended use; • preparation of and submission to the FDA of an NDA after completion of all pivotal trials; • a determination by the FDA within 60 days of its receipt of an NDA to file the application for review; • satisfactory completion of an FDA advisory committee review, if applicable; • satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current Good Manufacturing Practice (cGMP) requirements to assure that the facilities, methods, and controls are adequate to preserve the drug’s identity, strength, quality, and purity, and of selected clinical investigation sites to assess compliance with GCPs; and • FDA review and approval of the NDA to permit commercial marketing of the product for particular indications for use in the United States.
The process required by the FDA before a drug may be marketed in the United States generally involves the following: • completion of nonclinical laboratory tests, animal studies, and formulation studies in accordance with FDA’s Good Laboratory Practice (GLP) requirements and other applicable regulations; • submission to the FDA of an Investigational New Drug application (IND) which must become effective before human clinical trials may begin; • approval by an independent Institutional Review Board (IRB) or ethics committee at each clinical site before each trial may be initiated; • performance of adequate and well-controlled human clinical trials in accordance with good clinical practices (GCP) to establish the safety and efficacy of the proposed drug for its intended use; • preparation of and submission to the FDA of an NDA after completion of all pivotal trials; • a determination by the FDA within 60 days of its receipt of an NDA to file the application for review; • satisfactory completion of an FDA advisory committee review, if applicable; • satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current Good Manufacturing Practice (cGMP) requirements to assure that the facilities, methods, and controls are adequate to preserve the drug’s identity, strength, quality, and purity, and potential inspection of selected clinical investigation sites to assess compliance with GCPs; and • FDA review and approval of the NDA to permit commercial marketing of the product for particular indications for use in the United States.
Scalp Psoriasis Key Completed Trials 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.
Scalp Psoriasis Key Completed Trials 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 ZORYVE foam 0.3% or a matching vehicle administered once-daily in subjects with scalp and body psoriasis ages 12 and older.
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 believe ZORYVE cream 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.
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 payer. 33 Table of Contents Index to Financial Statements 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.
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 payer. 37 Table of Contents Index to Financial Statements 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.
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.
We commercially launched ZORYVE cream 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 cream is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use.
Topical corticosteroids, or TCS, are commonly used as the first-line therapy for the treatment of inflammatory skin conditions such as psoriasis, atopic dermatitis, and seborrheic dermatitis. While many patients see improvements, long-term TCS treatment carries the risk of a variety of significant side effects.
Topical corticosteroids ("TCS"), are commonly used as the first-line therapy for the treatment of inflammatory skin conditions such as psoriasis, atopic dermatitis, and seborrheic dermatitis. While many patients see improvements, long-term TCS treatment carries the risk of a variety of significant side effects.
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.
ZORYVE 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.
Figures: Plaque Psoriasis Source: DermNet (right) 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, until the recent approvals of ZORYVE and tapinarof.
Figures: Plaque Psoriasis Source: DermNet (right) 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, until the recent approvals of ZORYVE cream and tapinarof.
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.
We believe our management team's experience in developing dermatological drugs, including biologics, will enable us to 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.
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.
Of the subjects treated with ZORYVE 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. There were no treatment-related serious adverse events.
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.
We commercially launched ZORYVE cream 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.
ARQ-234 binds to CD200R and has the potential to restore immune homeostasis by inducing inhibitory signaling on immune cells that regulate inflammation. 18 Table of Contents Index to Financial Statements 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.
ARQ-234 binds to CD200R and has the potential to restore immune homeostasis by inducing inhibitory signaling on immune cells that regulate inflammation. 21 Table of Contents Index to Financial Statements 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.
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: oral PF-06651600 and oral PF-06700841, both under development by Pfizer Inc. 22 Table of Contents Index to Financial Statements Commercial Operations We intend to commercialize ZORYVE and our other product candidates ourselves in the United States and Canada within the dermatology specialty.
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: oral PF-06651600 and oral PF-06700841, both under development by Pfizer Inc. 25 Table of Contents Index to Financial Statements Commercial Operations We intend to commercialize ZORYVE and our other product candidates ourselves in the United States and Canada within the dermatology specialty.
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. • Evaluate strategic opportunities to in - license or acquire best-in-class dermatology assets consistent with our core strategy.
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 ZORYVE cream, ZORYVE foam, and ARQ-252/ARQ-255. • Evaluate strategic opportunities to in - license or acquire best-in-class dermatology assets consistent with our core strategy.
Figure: Alopecia Areata 19 Table of Contents 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.
Figure: Alopecia Areata 22 Table of Contents 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.
Scalp psoriasis can also be associated with hair loss, likely due to damage to the hair from excessive scratching, rubbing, or combing of the affected area. 16 Table of Contents Index to Financial Statements Figures: Scalp Psoriasis Source: DermNet (left) Current Scalp Psoriasis Treatment Landscape Scalp psoriasis treatments are similar to plaque psoriasis treatments, given that the plaques are identical to the plaques in other body areas.
Scalp psoriasis can also be associated with hair loss, likely due to damage to the hair from excessive scratching, rubbing, or combing of the affected area. 19 Table of Contents Index to Financial Statements Figures: Scalp Psoriasis Source: DermNet (left) Current Scalp Psoriasis Treatment Landscape Scalp psoriasis treatments are similar to plaque psoriasis treatments, given that the plaques are identical to the plaques in other body areas.
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).
Additionally, a d urable treatment effect was maintained through 52 to 64 weeks as 57.1% (n=185) of ZORYVE 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).
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.
Beyond ZORYVE, 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.
Physicians are especially wary of using steroids near the eyes due to the potential increased risk of cataracts and glaucoma. Finally, many physicians are reluctant to treat chronically with steroids and TCIs, the main anti-inflammatory agents used in treatment of seborrheic dermatitis. We believe roflumilast foam may present a unique dual mechanism of action to treat patients with seborrheic dermatitis.
Physicians are especially wary of using steroids near the eyes due to the potential increased risk of cataracts and glaucoma. Finally, many physicians are reluctant to treat chronically with steroids and TCIs, the main anti-inflammatory agents used in treatment of seborrheic dermatitis. We believe ZORYVE foam may present a unique dual mechanism of action to treat patients with seborrheic dermatitis.
Seborrheic Dermatitis Key Completed Trials 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.
Seborrheic Dermatitis Key Completed Trials 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 ZORYVE foam 0.3% administered once-daily.
However, companies may share truthful and not misleading information that is otherwise consistent with a product’s FDA-approved labelling. 31 Table of Contents Index to Financial Statements The Hatch-Waxman Act Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization for a new drug.
However, companies may share truthful and not misleading information that is otherwise consistent with a product’s FDA-approved labelling. 35 Table of Contents Index to Financial Statements The Hatch-Waxman Act Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization for a new drug.
Additional information required by this item is incorporated herein by reference to Part II, Item 6, “Selected Financial Data.” 37 Table of Contents Index to Financial Statements About Arcutis Biotherapeutics We were formed under the laws of the State of Delaware in June 2016 under the name Arcutis, Inc. and changed our name to Arcutis Biotherapeutics, Inc. in October 2019.
Additional information required by this item is incorporated herein by reference to Part II, Item 6, “Selected Financial Data.” 41 Table of Contents Index to Financial Statements About Arcutis Biotherapeutics We were formed under the laws of the State of Delaware in June 2016 under the name Arcutis, Inc. and changed our name to Arcutis Biotherapeutics, Inc. in October 2019.
In addition, there are several prescription product candidates under development that could potentially be used to treat atopic dermatitis and compete with roflumilast cream and ARQ-234, including but not limited to: topical tapinarof, under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.
In addition, there are several prescription product candidates under development that could potentially be used to treat atopic dermatitis and compete with ZORYVE cream and ARQ-234, including but not limited to: topical tapinarof, under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.
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. Additionally, the product does not melt on the fingers prior to application.
ZORYVE 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. Additionally, the product does not melt on the fingers prior to application.
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 25 Table of Contents Index to Financial Statements licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis.
We are obligated to pay royalties until the later of (1) the expiration of the last valid claim of the licensed patent rights 28 Table of Contents Index to Financial Statements 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.
Even if one or more products are 34 Table of Contents 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.
Even if one or more products are 38 Table of Contents 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.
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 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 8 weeks.
Because the pathogenesis of seborrheic dermatitis potentially includes both a fungal overgrowth component and an inflammatory component, roflumilast foam’s putative dual mechanism of action may provide symptomatic improvement for patients not achieving suitable responses from currently available therapies.
Because the pathogenesis of seborrheic dermatitis potentially includes both a fungal overgrowth component and an inflammatory component, ZORYVE foam’s putative dual mechanism of action may provide symptomatic improvement for patients not achieving suitable responses from currently available therapies.
The impact of hand eczema on patients can be significant, leading to work absences or disability, social stigmatization, and psychosocial distress. 20 Table of Contents Index to Financial Statements Figures: Hand Eczema Current Hand Eczema Treatment Landscape Hand eczema is a difficult disease to treat.
The impact of hand eczema on patients can be significant, leading to work absences or disability, social stigmatization, and psychosocial distress. 23 Table of Contents Index to Financial Statements Figures: Hand Eczema Current Hand Eczema Treatment Landscape Hand eczema is a difficult disease to treat.
The Hatch-Waxman Act also provides three years of marketing exclusivity to the holder of an NDA (including a 505(b)(2) NDA) for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical studies (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted/sponsored by the applicant.
The Hatch-Waxman Act also provides three years of non-patent exclusivity to the holder of an NDA (including a 505(b)(2) NDA) for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical studies (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted/sponsored by the applicant.
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.
ZORYVE foam contains the same highly potent and selective PDE4 inhibitor in ZORYVE cream, and is nearly identical to ZORYVE 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.
It quickly and easily rubs into the skin without leaving a greasy residue, does not stain clothing or bedding, or have an unpleasant smell. Roflumilast is a highly potent and selective PDE4 inhibitor that was approved by the FDA for systemic treatment to reduce the risk of exacerbations of chronic obstructive pulmonary disease (COPD) in 2011.
It quickly and easily rubs into the skin without leaving a greasy residue, does not stain clothing or bedding, or have an unpleasant smell. Roflumilast is a highly potent and selective PDE4 inhibitor that was approved by the FDA as an oral systemic treatment to reduce the risk of exacerbations of chronic obstructive pulmonary disease (COPD) in 2011.
In addition to the opportunity in treatment resistant patients, we believe roflumilast foam may be an option for some patients as a first-line therapy, especially patients with involvement of the face where other therapies are contraindicated.
In addition to the opportunity in treatment resistant patients, we believe ZORYVE foam may be an option for some patients as a first-line therapy, especially patients with involvement of the face where other therapies are contraindicated.
On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was into law.
On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was enacted into law.
Item 1. BUSINESS Overview 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.
Item 1. BUSINESS Overview We are a 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.
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 ZORYVE.
Approximately 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 ZORYVE cream.
Roflumilast foam will not stain clothing or bedding and does not have an unpleasant smell. Roflumilast foam is designed for simple once-a-day application and neither burns nor stings on application.
ZORYVE foam will not stain clothing or bedding and does not have an unpleasant smell. ZORYVE foam is designed for simple once-a-day application and neither burns nor stings on application.
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 plan to develop ARQ-234 in atopic dermatitis, where it could be a potentially highly complementary treatment option to ZORYVE cream in that indication, if approved.
Based on clinical data to date across indications, topical roflumilast has demonstrated strong anti-inflammatory properties. In addition, a recent nonclinical study demonstrated that roflumilast foam may also possess anti-fungal effects, specifically against Malassezia , the fungus implicated in seborrheic dermatitis.
Based on clinical data to date across indications, ZORYVE has demonstrated strong anti-inflammatory properties. In addition, a recent nonclinical study demonstrated that ZORYVE foam may also possess anti-fungal effects, specifically against Malassezia , the fungus implicated in seborrheic dermatitis.
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.
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, 2023, we had 296 full-time employees.
All subjects applied ZORYVE once daily for 52 weeks at home.
All subjects applied ZORYVE cream once daily for 52 weeks at home.
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 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.
The study met both co-primary endpoints and all secondary endpoints. Specifically, 67.3% of individuals treated with ZORYVE foam achieved S-IGA Success at Week 8, compared to 28.1% of individuals treated with vehicle (P ZORYVE foam was well-tolerated, with the incidence of TEAEs low and generally similar to vehicle, with most TEAEs assessed as mild-to-moderate severity.
Thus, approval of an ANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the applicant makes and the reference drug sponsor's decision to initiate patent litigation. 32 Table of Contents Index to Financial Statements Hatch-Waxman Exclusivity The Hatch-Waxman Act establishes a period of regulatory exclusivity for certain approved drug products during which the FDA cannot accept for review an ANDA or 505(b)(2) NDA that relies on the branded reference drug.
Thus, approval of an ANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the applicant makes and the reference drug sponsor's decision to initiate patent litigation. 36 Table of Contents Index to Financial Statements Hatch-Waxman Exclusivity The Hatch-Waxman Act establishes a period of non-patent data exclusivity for certain approved drug products during which the FDA cannot accept for review an ANDA or 505(b)(2) NDA that relies on the branded reference drug.
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.
INTEGUMENT-1 and INTEGUMENT-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 ZORYVE cream 0.15%, or vehicle.
However, due to the limitations on duration of treatment to between two and eight weeks, most physicians will switch the patient to a low- to mid-potency steroid or to a vitamin D analog to manage the patient’s psoriasis chronically. These “step down” options provide less symptomatic improvement and are often irritating.
However, due to the limitations on duration of treatment to between 2 and 8 weeks, most physicians will switch the patient to a low- to mid-potency steroid or to a vitamin D analog to manage the patient’s psoriasis chronically. These “step down” options provide less symptomatic improvement and are often irritating.
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. D. From time to time, we also retain independent contractors to support our organization.
Of these full-time employees, three have an M.D., four have been Nurse Practitioners or Physician Assistants, and 8% have a PhD or Pharm. D. From time to time, we also retain independent contractors to support our organization.
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).
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 ZORYVE foam completed the full 8 weeks, and few subjects discontinued the study due to adverse events (2.5% of subjects treated with ZORYVE foam and 1.3% of the subjects in the vehicle group).
With 24 Table of Contents 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.
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.
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 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.
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 cream 14 Table of Contents Index to Financial Statements achieved IGA Success, compared to 6.1% of subjects treated with vehicle (p ZORYVE 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.
A total of 432 subjects were enrolled in the study and randomized 2:1 to roflumilast foam or vehicle.
A total of 432 subjects were enrolled in the study and randomized 2:1 to ZORYVE foam or vehicle.
Therefore, coverage and reimbursement can differ significantly from payer to payer. 35 Table of Contents Index to Financial Statements U.S.
Therefore, coverage and reimbursement can differ significantly from payer to payer. 39 Table of Contents Index to Financial Statements U.S.
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 26 Table of Contents Index to Financial Statements 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.
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.
A Fast Track product candidate may 29 Table of Contents Index to Financial Statements 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 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.
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. 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.
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. 30 Table of Contents Index to Financial Statements 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.
Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger Phase 3 clinical trials. • Phase 3: 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, 27 Table of Contents Index to Financial Statements generally at multiple geographically dispersed clinical trial sites.
Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger Phase 3 clinical trials. • Phase 3: 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.
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).
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 40 Table of Contents Index to Financial Statements 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).
This 11 Table of Contents Index to Financial Statements 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.
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.
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.
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. 31 Table of Contents Index to Financial Statements 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.
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. Pruritus (itching) is a particularly common and bothersome symptom for patients, which can be severe and impact sleep patterns.
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. Pruritus (itching) is a particularly common and bothersome symptom for patients, which can be severe and 11 Table of Contents Index to Financial Statements impact sleep patterns.
Current Atopic Dermatitis Treatment Landscape The vast majority of atopic dermatitis patients are being treated with topical therapies, particularly low- to mid-potency topical steroids and TCIs, and these two classes of drugs constituted nearly all atopic dermatitis prescriptions in 2022.
Current Atopic Dermatitis Treatment Landscape 13 Table of Contents Index to Financial Statements The vast majority of atopic dermatitis patients are being treated with topical therapies, particularly low- to mid-potency topical steroids and TCIs, and these two classes of drugs constituted nearly all atopic dermatitis prescriptions in 2022.
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.
We also paid AstraZeneca $7.5 million upon ZORYVE cream'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 27 Table of Contents Index to Financial Statements worldwide sales.
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.
We anticipate filing additional patent applications directed towards compositions, 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 27, 2024, we own one issued U.S. patent, one issued Australian patent, one issued Chinese patent, one issued Eurasian patent, one issued Israeli patent, one issued Indian patent, one issued Japanese patent, one issued Mexican patent, one issued South Korean patent, one issued Singapore patent, one issued South African patent, and 9 pending foreign applications (one each in Brazil, Canada, Europe, Great Britain, Hong Kong, Korea, New Zealand; and three under the Patent Cooperation Treaty), relating to ARQ-234 and other CD200 mutant proteins.
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.
For example, as a condition 32 Table of Contents Index to Financial Statements 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.
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.
In clinical trials, treatment with tapinarof was associated with folliculitis, contact dermatitis, burning, stinging, and itching. 12 Table of Contents Index to Financial Statements 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.
Post-Approval Requirements Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product. There also are continuing, annual program fee requirements for any marketed products.
Post-Approval Requirements Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product.
Government Regulation Government authorities in the United States, at the federal, state, and local level, and in other countries and jurisdictions extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products.
See Note 6 to the consolidated financial statements. 29 Table of Contents Index to Financial Statements Government Regulation Government authorities in the United States, at the federal, state, and local level, and in other countries and jurisdictions extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products.
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.
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 eliminated the statutory Medicaid drug rebate cap, beginning January 1, 2024.
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 8 Table of Contents Index to Financial Statements for the treatment of atopic dermatitis, if approved.
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 ZORYVE for the treatment of atopic dermatitis, if approved.
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 own one issued U.S. patent and have filed four pending U.S. patent applications and 38 pending foreign patent applications (three in each of Australia, Brazil, Canada, Europe, Israel, Japan, Korea, Mexico, Singapore, and New Zealand, two in each of China and India, one in each of Indonesia, Thailand, and Vietnam, and one under the Patent Cooperation Treaty) relating to, among other things, ivarmacitinib compositions and methods of treatment using ivarmacitinib compositions.
Our platform has already generated several significant innovations, including: • Our innovative topical formulation of roflumilast (patented); • The pharmacokinetic characteristics relating to improving delivery and extending half-life of both the cream and foam formulations of topical roflumilast (patented); • A novel topical cream without skin-drying surfactants (patent pending); • The first topical treatment for seborrheic dermatitis with dual anti-fungal and anti-inflammatory action (patent pending); • Our novel “4D” deep-penetrating formulation allowing topical delivery deeper in the dermis (patent pending); and Roflumilast Cream (ARQ-151) 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.
Our platform has already generated several significant innovations, including: • Our innovative topical cream and foam formulations of roflumilast (patented); • The pharmacokinetic characteristics relating to improving delivery and extending half-life of both the cream and foam formulations of topical roflumilast (patented); • A novel topical cream without skin-drying surfactants (patent pending); • A novel method for treating a fungal infection by administering a composition comprising roflumilast (patented); • Our novel “4D” deep-penetrating formulation allowing topical delivery deeper in the dermis (patent pending); and • A composition of roflumilast without a paraben preservative (patent pending). 10 Table of Contents Index to Financial Statements ZORYVE Cream (ARQ-151) Our lead product, ZORYVE cream, 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.
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.
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 ZORYVE cream in that indication, if approved.
Roflumilast Cream Clinical Development Plaque Psoriasis 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 Cream Clinical Development Plaque Psoriasis We commercially launched ZORYVE cream 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 October 2023, we received FDA approval for an expanded indication down to 6 years of age.
The primary outcome measures of this long-term safety study were the occurrence of TEAEs and the occurrence of serious adverse events. 13 Table of Contents Index to Financial Statements 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.
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.
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 seek partnerships that allow us to target other physicians, especially pediatricians, allergists, and primary care physicians in the United States, to maximize the potential of our product candidates. In Canada, we built the limited infrastructure that we believe is required to support the commercialization of our products in Canada.
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.
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.
Topical treatments are used for nearly all patients, but existing topicals are limited by one or more of the following: modest response rates, side effects, patient adherence, application site restrictions, and limits on duration of therapy.
There are many approved treatments for these conditions, but a large opportunity remains due to issues with existing treatments. Topical treatments are used for nearly all patients, but existing topicals are limited by one or more of the following: modest response rates, side effects, patient adherence, application site restrictions, and limits on duration of therapy.
Additionally, TCIs only provide symptomatic improvement in seborrheic dermatitis in areas of skin that are very thin and where the drug can penetrate (i.e., largely the periocular areas only).
Additionally, TCIs only provide symptomatic improvement in seborrheic dermatitis in areas of skin that are very thin and where the drug can penetrate (i.e., largely the periocular areas only). • Antifungal agents , particularly azoles such as ketoconazole, are the cornerstone of therapy for seborrheic dermatitis.
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, 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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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

170 edited+76 added−32 removed450 unchanged
Biggest changeThe commercial success of ZORYVE and the clinical and commercial success of other product candidates will depend on a number of factors, including the following: • timely completion of our nonclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate, particularly as a result of the impact of the COVID-19 pandemic and competitive trials, and will depend substantially upon the performance of third-party contractors; • whether we are required by the FDA or similar foreign regulatory authorities to conduct additional clinical trials or other studies beyond those planned to support the approval and commercialization of our product candidates or any future product candidates; • acceptance of our proposed indications and primary and secondary endpoint assessments relating to the proposed indications of our product candidates by the FDA and similar foreign regulatory authorities; • the prevalence, duration, and severity of potential side effects or other safety issues experienced with ZORYVE or our product candidates; • the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities; • achieving, maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory requirements applicable to ZORYVE or any of our product candidates; • the willingness of physicians and patients to utilize or adopt ZORYVE and our product candidates, if approved; • the ability of third parties upon which we rely to manufacture clinical trial and commercial supplies of ZORYVE or any of our product candidates to remain in good standing with relevant regulatory authorities and to develop, validate, and maintain commercially viable manufacturing processes that are compliant with cGMP; • our ability to successfully implement and execute on a marketing strategy for ZORYVE and to commercialize any of our product candidates in the United States and internationally, if approved, whether alone or in collaboration with others; • the availability of coverage and adequate reimbursement from private third-party payers and governmental healthcare programs, such as Medicare and Medicaid; • acceptance by physicians, payers, and patients of the benefits, safety, and efficacy of ZORYVE or any product candidates, if approved, including relative to alternative and competing treatments; • patient demand for any approved products; • our ability to establish and enforce intellectual property rights in and to any current and future products and product candidates; • our ability to avoid third-party patent interference, intellectual property challenges, or intellectual property infringement claims; and • the ability to raise any additional required capital on acceptable terms, or at all. 43 Table of Contents Index to Financial Statements Furthermore, because ZORYVE and each of our product candidates targets one or more indications in the medical dermatology field, if ZORYVE or any of our product candidates encounter safety or efficacy problems, developmental delays, regulatory issues, supply issues, or other problems, our development plans for the affected product or product candidate and some or all of our other product candidates could be significantly harmed, which would harm our business.
Biggest changeThe commercial success of ZORYVE and the clinical and commercial success of other product candidates will depend on a number of factors, including the following: • timely completion of our nonclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate, including as a result of competitive trials, and will depend substantially upon the performance of third-party contractors; • whether we are required by the FDA or similar foreign regulatory authorities to conduct additional clinical trials or other studies beyond those planned to support the approval and commercialization of our product candidates or any future product candidates; • acceptance of our proposed indications and primary and secondary endpoint assessments relating to the proposed indications of our product candidates by the FDA and similar foreign regulatory authorities; • the prevalence, duration, and severity of potential side effects or other safety issues experienced with ZORYVE or our product candidates; • the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities; • achieving, maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory requirements applicable to ZORYVE or any of our product candidates; • the willingness of physicians and patients to utilize or adopt ZORYVE and our product candidates, if approved; • the ability of third parties upon which we rely to manufacture clinical trial and commercial supplies of ZORYVE or any of our product candidates to remain in good standing with relevant regulatory authorities and to develop, validate, and maintain commercially viable manufacturing processes that are compliant with cGMP; • our ability to successfully implement and execute on a marketing strategy for ZORYVE and to commercialize any of our product candidates in the United States and internationally, if approved, whether alone or in collaboration with others; • the availability of coverage and adequate reimbursement from private third-party payers and governmental healthcare programs, such as Medicare and Medicaid; • acceptance by physicians, payers, and patients of the benefits, safety, and efficacy of ZORYVE or any product candidates, if approved, including relative to alternative and competing treatments; • patient demand for any approved products; • our ability to establish and enforce intellectual property rights in and to any current and future products and product candidates; 48 Table of Contents Index to Financial Statements • our ability to avoid third-party patent interference, intellectual property challenges, or intellectual property infringement claims; and • the ability to raise any additional required capital on acceptable terms, or at all.
We may choose not to continue developing or commercializing ZORYVE or any of our product candidates at any time during development or after approval, which would reduce or eliminate our potential return on investment for ZORYVE and product candidates.
We may choose not to continue developing or commercializing ZORYVE or any of our product candidates at any time during development or after approval, which would reduce or eliminate our potential return on investment for ZORYVE, and our product candidates.
If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or comparable regulatory authorities in foreign jurisdictions, we may not be able to rely on their manufacturing facilities for the manufacture ZORYVE or our product candidates.
If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or comparable regulatory authorities in foreign jurisdictions, we may not be able to rely on their manufacturing facilities for the manufacture of ZORYVE or our product candidates.
Under the unitary patent system, European applications will have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unified Patent Court (UPC). As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation.
Under the unitary patent system, European applications have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unified Patent Court (UPC). As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation.
Later discovery of previously unknown problems with ZORYVE or our product candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things: • restrictions on the marketing or manufacturing of ZORYVE or our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls; • fines, warning, or untitled letters or holds on clinical trials; • refusal by the FDA to accept new marketing applications or supplements, approve or otherwise authorize for marketing pending applications or supplements to applications filed by us or suspension or revocation of approvals or other marketing authorizations; • product seizure or detention, or refusal to permit the import or export of our product candidates; and • injunctions or the imposition of civil or criminal penalties.
Later discovery of previously unknown problems with ZORYVE or our product candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things: • restrictions on the marketing or manufacturing of ZORYVE or our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls; • fines, warning letters, or untitled letters or holds on clinical trials; • refusal by the FDA to accept new marketing applications or supplements, approve or otherwise authorize for marketing pending applications or supplements to applications filed by us or suspension or revocation of approvals or other marketing authorizations; • product seizure or detention, or refusal to permit the import or export of our product candidates; and • injunctions or the imposition of civil or criminal penalties.
These provisions include the following: • a classified board of directors with three year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; • no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; • the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; • the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror; • the ability of our board of directors to alter our bylaws without obtaining stockholder approval; • the required approval of a super-majority of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and removal of directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by the chief executive officer or the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and • advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us. 81 Table of Contents Index to Financial Statements In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.
These provisions include the following: • a classified board of directors with three year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; • no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; • the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; • the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror; • the ability of our board of directors to alter our bylaws without obtaining stockholder approval; • the required approval of a super-majority of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and removal of directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by the chief executive officer or the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and • advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us. 87 Table of Contents Index to Financial Statements In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.
Accordingly, these subjective assessments can complicate clinical trial design, adversely impact the ability of a study to show a statistically significant improvement, and generally adversely impact a clinical development program by introducing additional uncertainties. 49 Table of Contents Index to Financial Statements The use of patient reported outcome instruments in our clinical trials and the inclusion of such data in any product labeling depends on, but is not limited to, the FDA’s review of the following: • the relevance and importance of the concept(s) of interest to the target patient population; • the strengths and limitations of the instrument within the given context of use; • the design and conduct of the trials; • the adequacy of the submitted data, for example, rigorous data collection and methods to handle missing data; and • the magnitude of the statistically significant treatment effect should be meaningful to subjects.
Accordingly, these subjective assessments can complicate clinical trial design, adversely impact the ability of a study to show a statistically significant improvement, and generally adversely impact a clinical development program by introducing additional uncertainties. 54 Table of Contents Index to Financial Statements The use of patient reported outcome instruments in our clinical trials and the inclusion of such data in any product labeling depends on, but is not limited to, the FDA’s review of the following: • the relevance and importance of the concept(s) of interest to the target patient population; • the strengths and limitations of the instrument within the given context of use; • the design and conduct of the trials; • the adequacy of the submitted data, for example, rigorous data collection and methods to handle missing data; and • the magnitude of the statistically significant treatment effect should be meaningful to subjects.
If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
If a prolonged government shutdown occurs, or if global health concerns prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
For example, various macroeconomic factors could adversely affect our business, financial condition and results of operations, including changes in inflation, interest rates and overall economic conditions and uncertainties, including those resulting from political instability (including workforce uncertainty), trade disputes between nations and the current and future conditions in the global financial markets.
For example, various macroeconomic factors could adversely affect our business, financial condition and results of operations, including changes in inflation, interest rates and overall economic conditions and uncertainties, including those resulting from political instability (including workforce uncertainty), conflicts, trade disputes between nations and the current and future conditions in the global financial markets.
We currently intend to invest our future earnings, if any, to fund our growth. In addition, the terms of our Loan Agreement restrict our ability to pay dividends to limited circumstances. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.
We currently intend to invest our future earnings, if any, to fund our growth and pay our loan. In addition, the terms of our Loan Agreement restrict our ability to pay dividends to limited circumstances. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.
Certain of our primary and secondary endpoints in our clinical trials, including our already completed and planned clinical trials in atopic dermatitis, vitiligo, chronic hand eczema, scalp and body psoriasis and seborrheic dermatitis involve subjective assessments by physician and subjects, which can increase the uncertainty of clinical trial outcomes.
Certain of our primary and secondary endpoints in our clinical trials, including our already completed and planned clinical trials in atopic dermatitis, vitiligo, chronic hand eczema and scalp and body psoriasis involve subjective assessments by physician and subjects, which can increase the uncertainty of clinical trial outcomes.
Our operating expenses and capital requirements are difficult to predict, depend on many factors and are affected by, and are subject to assumptions regarding, among others: • the timing, receipt, and amount of sales of any current and future products, including the success of our commercialization efforts involving ZORYVE; • market acceptance of our current and future products, including ZORYVE, and the impact of competing products; • the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for any current or future products; • our ability to successfully execute on our business plan and our internal projections and estimates of costs and execution timing; • the scope, progress, results, and costs of developing product candidates and conducting nonclinical studies and clinical trials, including in connection with our current product candidates; • suspensions or delays in enrollment of our ongoing and future clinical trials, issues with data collection, or changes to the number of subjects we decide to enroll in our clinical trials, including as a result of the COVID-19 pandemic, competing trials, or otherwise; • 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 and the 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 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 impact of any acquisitions or similar transactions or partnerships; • the costs related to milestone and royalty payments due to AstraZeneca, Hengrui, the former owners of Ducentis, which we acquired in September 2022, or any future collaboration or licensing partners upon the achievement of negotiated milestones; 39 Table of Contents Index to Financial Statements • any product liability or other lawsuits related to our products; • the expenses needed to attract and retain skilled personnel; and • the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio.
Our operating expenses and capital requirements are difficult to predict, depend on many factors and are affected by, and are subject to assumptions regarding, among others: • the timing, receipt, and amount of sales of any current and future products, including the success of our commercialization efforts involving ZORYVE; • market acceptance of our current and future products, including ZORYVE, and the impact of competing products; • the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for any current or future products; • our ability to successfully execute on our business plan and our internal projections and estimates of costs and execution timing; • the scope, progress, results, and costs of developing product candidates and conducting nonclinical studies and clinical trials, including in connection with our current product candidates; • suspensions or delays in enrollment of our ongoing and future clinical trials, issues with data collection, or changes to the number of subjects we decide to enroll in our clinical trials, including as a result of competing trials or otherwise; 43 Table of Contents Index to Financial Statements • 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 and the 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 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 impact of any acquisitions or similar transactions or partnerships; • the costs related to milestone and royalty payments due to AstraZeneca, Hengrui, the former owners of Ducentis, which we acquired in September 2022, or any future collaboration or licensing partners upon the achievement of negotiated milestones; • any product liability or other lawsuits related to our products; • the expenses needed to attract and retain skilled personnel; and • the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio.
In addition, it is possible that the FDA may refuse to file for substantive review any NDAs that we submit for our product candidates or may conclude after review of our applications that they are insufficient to obtain marketing approval of our product candidates.
In addition, it is possible that the FDA may refuse to file for substantive review any NDAs or sNDAs that we submit for our product candidates or may conclude after review of our applications that they are insufficient to obtain marketing approval of our product candidates.
If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. 84 Table of Contents Index to Financial Statements If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop our current and any future product candidates, commercialize ZORYVE or our product candidates or otherwise implement our business plan.
If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. 90 Table of Contents Index to Financial Statements If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop our current and any future product candidates, commercialize ZORYVE or our product candidates or otherwise implement our business plan.
Collaborations are subject to numerous risks, which may include risks that: • collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations; • collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in their strategic focus due to their acquisition of competitive products or their internal development of competitive products, availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities; • collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial, abandon a product candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing; • collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates; 56 Table of Contents Index to Financial Statements • a collaborator with sales, marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities; • we could grant exclusive rights to our collaborators that would prevent us from collaborating with others; • collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability; • disputes may arise between us and a collaborator that causes the delay or termination of the research, development, or commercialization of our current or future product candidates or that results in costly litigation or arbitration that diverts management attention and resources; • collaborations may be terminated, and, if terminated, this may result in a need for additional capital to pursue further development or commercialization of the applicable current or future product candidates; • collaborators may own or co-own intellectual property covering products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property; • disputes may arise with respect to the ownership of any intellectual property developed pursuant to our collaborations; and • a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.
Collaborations are subject to numerous risks, which may include risks that: • collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations; • collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in their strategic focus due to their acquisition of competitive products or their internal development of competitive products, availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities; • collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial, abandon a product candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing; • collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates; • a collaborator with sales, marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities; • we could grant exclusive rights to our collaborators that would prevent us from collaborating with others; • collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability; • disputes may arise between us and a collaborator that causes the delay or termination of the research, development, or commercialization of our current or future product candidates or that results in costly litigation or arbitration that diverts management attention and resources; • collaborations may be terminated, and, if terminated, this may result in a need for additional capital to pursue further development or commercialization of the applicable current or future product candidates; • collaborators may own or co-own intellectual property covering products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property; • disputes may arise with respect to the ownership of any intellectual property developed pursuant to our collaborations; and • a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.
Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects. 48 Table of Contents Index to Financial Statements Topline or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects. 53 Table of Contents Index to Financial Statements Topline or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
The validity, scope, and enforceability of any patents listed in the Orange Book that cover ZORYVE, roflumilast cream, roflumilast foam, ARQ-252, ARQ-255, or ARQ-234 can be challenged by competitors.
The validity, scope, and enforceability of any patents listed in the Orange Book that cover ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234 can be challenged by competitors.
For example, the primary endpoint in a number of our clinical trials, including our Phase 3 clinical trials of roflumilast cream in plaque psoriasis and atopic dermatitis and our Phase 3 clinical trials of roflumilast foam in seborrheic dermatitis and scalp and body psoriasis, was or is based on the percentage of subjects achieving a score of “clear” or “almost clear” plus at least a 2-grade improvement from baseline on the 5 point IGA scale, referred to as IGA Success.
For example, the primary endpoint in a number of our clinical trials, including our Phase 3 clinical trials of ZORYVE cream in plaque psoriasis and atopic dermatitis and our Phase 3 clinical trials of ZORYVE foam in seborrheic dermatitis and scalp and body psoriasis, was or is based on the percentage of subjects achieving a score of “clear” or “almost clear” plus at least a 2-grade improvement from baseline on the 5 point IGA scale, referred to as IGA Success.
Similarly, due to the complexities of our transition to a commercial-stage company, it is challenging to estimate the actual amounts necessary to successfully commercialize any products approved for sale.
Similarly, due to the complexities of our recent transition to a commercial-stage company, it is challenging to estimate the actual amounts necessary to successfully commercialize any products approved for sale.
However, future sales of substantial amounts of our common stock in the public market, including shares issued upon exercise of our outstanding warrant or options, or the perception that such sales may occur, could adversely affect the market price of our common stock. 80 Table of Contents Index to Financial Statements Our ability to utilize our Net Operating Loss carryforwards and research and development income tax credit carryforwards may be limited.
However, future sales of substantial amounts of our common stock in the public market, including shares issued upon exercise of our outstanding warrant or options, or the perception that such sales may occur, could adversely affect the market price of our common stock. 86 Table of Contents Index to Financial Statements Our ability to utilize our Net Operating Loss carryforwards and research and development income tax credit carryforwards may be limited.
Physicians may also misuse ZORYVE or our product candidates or use improper techniques, which may lead to adverse results, side effects or injury and, potentially, subsequent product liability claims.
Physicians and patients may also misuse ZORYVE or our product candidates or use improper techniques, which may lead to adverse results, side effects or injury and, potentially, subsequent product liability claims.
There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it. 82 Table of Contents Index to Financial Statements General Risk Factors Unfavorable global and regional economic, political and health conditions could adversely affect our business, financial condition or results of operations.
There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it. 88 Table of Contents Index to Financial Statements General Risk Factors Unfavorable global and regional economic, political and health conditions could adversely affect our business, financial condition or results of operations.
Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing ZORYVE, roflumilast foam, ARQ-252, ARQ-255, or ARQ-234.
Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234.
Having a mandatory nonexclusive license grant may diminish the value of our patents as well as making it more difficult to protect our products. In Europe, a new unitary patent system takes effect June 1, 2023, which will significantly impact European patents, including those granted before the introduction of such a system.
Having a mandatory nonexclusive license grant may diminish the value of our patents as well as making it more difficult to protect our products. In Europe, a new unitary patent system took effect June 1, 2023, which will significantly impact European patents, including those granted before the introduction of such a system.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: • limited daily trading volume resulting in the lack of a liquid market; • the success of, and fluctuations in, the commercial sales of ZORYVE or any product candidates approved for commercialization in the future; • the development status of our product candidates, including whether we discontinue development or if any of our product candidates receive regulatory approval; • the performance of third parties on whom we rely for clinical trials, manufacturing, marketing, sales and distribution, including their ability to comply with regulatory requirements; • regulatory, legal or political developments in the United States and foreign countries; • the results of our clinical trials and nonclinical studies; • the clinical results of our competitors or potential competitors; • the execution of our partnering and manufacturing arrangements; • our execution of collaboration, co-promotion, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements; • variations in the level of expenses related to our nonclinical and clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites; • variations in the level of expenses related to our commercialization activities for ZORYVE or any of our product candidates, if approved; 83 Table of Contents Index to Financial Statements • overall performance of the equity markets; • changes in operating performance and stock market valuations of other pharmaceutical companies; • market conditions or trends in our industry or the economy as a whole, including as a result of market volatility related to global health concerns and, in particular, the extreme volatility experienced during the ongoing COVID-19 pandemic; • the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC, and announcements relating to acquisitions, strategic transactions, licenses, joint ventures, capital commitments, intellectual property, litigation or other disputes impacting us or our business; • developments with respect to intellectual property rights; • our commencement of, or involvement in, litigation; • FDA or foreign regulatory actions affecting us or our industry; • changes in the structure of healthcare payment systems; • the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock; • ratings downgrades by any securities analysts who follow our common stock; • the development and sustainability of an active trading market for our common stock; • the size of our market float; • the expiration of market standoff or contractual lock-up agreements and future sales of our common stock by our officers, directors and significant stockholders; • recruitment or departure of key personnel; • changes in accounting principles; • other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and • any other factors discussed in this report.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: • limited daily trading volume resulting in the lack of a liquid market; • the success of, and fluctuations in, the commercial sales of ZORYVE or any product candidates approved for commercialization in the future; • the development status of our product candidates, including whether we discontinue development or if any of our product candidates receive regulatory approval; • the performance of third parties on whom we rely for clinical trials, manufacturing, marketing, sales and distribution, including their ability to comply with regulatory requirements; • regulatory, legal or political developments in the United States and foreign countries; • the results of our clinical trials and nonclinical studies; • the clinical results of our competitors or potential competitors; • the execution of our partnering and manufacturing arrangements; • our execution of collaboration, co-promotion, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements; • variations in the level of expenses related to our nonclinical and clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites; • variations in the level of expenses related to our commercialization activities for ZORYVE or any of our product candidates, if approved; • overall performance of the equity markets; • changes in operating performance and stock market valuations of other pharmaceutical companies; 89 Table of Contents Index to Financial Statements • market conditions or trends in our industry or the economy as a whole, including as a result of market volatility related to global health concerns; • the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC, and announcements relating to acquisitions, strategic transactions, licenses, joint ventures, capital commitments, intellectual property, litigation or other disputes impacting us or our business; • developments with respect to intellectual property rights; • our commencement of, or involvement in, litigation; • FDA or foreign regulatory actions affecting us or our industry; • changes in the structure of healthcare payment systems; • the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock; • ratings downgrades by any securities analysts who follow our common stock; • the development and sustainability of an active trading market for our common stock; • the size of our market float; • the expiration of market standoff or contractual lock-up agreements and future sales of our common stock by our officers, directors and significant stockholders; • recruitment or departure of key personnel; • changes in accounting principles; • other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and • any other factors discussed in this report.
In addition, there are several prescription product candidates under development that could potentially be used to treat atopic dermatitis and compete with roflumilast cream and ARQ-234, including but not limited to: topical tapinarof, under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.
In addition, there are several prescription product candidates under development that could potentially be used to treat atopic dermatitis and compete with ZORYVE cream and ARQ-234, including but not limited to: topical tapinarof, under development by Dermavant Sciences, Inc., topical delgocitinib, under development by LEO Pharma A/S and Japan Tobacco, Inc.
It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDAs that we may submit. Additionally, similar risks could apply to receipt of marketing authorizations by comparable regulatory authorities in foreign jurisdictions.
It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve any NDAs or sNDAs that we may submit. Additionally, similar risks could apply to receipt of marketing authorizations by comparable regulatory authorities in foreign jurisdictions.
There have been many lawsuits and other proceedings asserting patents and other intellectual property rights in the pharmaceutical and biotechnology industries. We cannot assure you that our exploitation of ZORYVE, roflumilast foam, ARQ-252, ARQ-255, or ARQ-234 will not infringe existing or future third-party patents.
There have been many lawsuits and other proceedings asserting patents and other intellectual property rights in the pharmaceutical and biotechnology industries. We cannot assure you that our exploitation of ZORYVE cream, ZORYVE foam, ARQ-252, ARQ-255, or ARQ-234 will not infringe existing or future third-party patents.
In addition, we paid AstraZeneca $7.5 million in August 2022 upon FDA approval to commercialize ZORYVE in the United States.
In addition, we paid AstraZeneca $7.5 million in August 2022 upon FDA approval to commercialize ZORYVE cream in the United States.
We do not currently carry biological or hazardous waste insurance coverage. 60 Table of Contents Index to Financial Statements Risks Related to Our Reliance on Third Parties We rely on third-party manufacturers to manufacture nonclinical, clinical and commercial supplies of ZORYVE and our product candidates.
We do not currently carry biological or hazardous waste insurance coverage. 67 Table of Contents Index to Financial Statements Risks Related to Our Reliance on Third Parties We rely on third-party manufacturers to manufacture nonclinical, clinical and commercial supplies of ZORYVE and our product candidates.
Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain non-physician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants, and certified nurse midwives) and teaching hospitals, the ownership and investment interests held by such physicians and their immediate family members; • federal civil monetary penalties laws, which impose civil fines for, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows, or should know, it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies; 73 Table of Contents Index to Financial Statements • the U.S.
Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain non-physician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants, and certified nurse midwives) and teaching hospitals, the ownership and investment interests held by such physicians and their immediate family members; • federal civil monetary penalties laws, which impose civil fines for, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows, or should know, it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies; • the U.S.
For example, we 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 (as defined below).
For example, we paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of ZORYVE cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product (as defined below).
Further, in countries where we do not have granted patents, third 62 Table of Contents Index to Financial Statements parties may be able to make, use, or sell products identical to or substantially similar to, ZORYVE and our product candidates.
Further, in countries where we do not have granted patents, third 69 Table of Contents Index to Financial Statements parties may be able to make, use, or sell products identical to or substantially similar to, ZORYVE and our product candidates.
If such an event were to affect our supply chain, it could have a material adverse effect on our business. 85 Table of Contents Index to Financial Statements Changes in tax laws or regulations could have a material adverse effect on our business and results of operations.
If such an event were to affect our supply chain, it could have a material adverse effect on our business. 91 Table of Contents Index to Financial Statements Changes in tax laws or regulations could have a material adverse effect on our business and results of operations.
The FDA or any foreign regulatory authorities can delay, limit, or deny approval of our product candidates for many reasons, including: • our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory authority that any of our product candidates is safe and effective for the requested indication; • the FDA or other relevant foreign regulatory authorities may disagree with the number, design, size, conduct, or implementation of our clinical trials, including the design of our Phase 3 clinical trials of roflumilast cream for the treatment of plaque psoriasis; • the FDA or other relevant foreign regulatory authorities may not find the data from nonclinical studies or clinical trials sufficient to demonstrate that the clinical and other benefits of these products candidates outweigh their safety risks or that there is an acceptable risk-benefit profile; • the results of our clinical trials may not meet the level of statistical significance or clinical meaningfulness required by the FDA or other relevant foreign regulatory authorities for marketing approval; 47 Table of Contents Index to Financial Statements • the FDA’s or the applicable foreign regulatory authority’s requirement for additional nonclinical studies or clinical trials which would increase our costs and prolong our development timelines; • the FDA or other relevant foreign regulatory authorities may disagree with our interpretation of data or significance of results from the nonclinical studies and clinical trials of any product candidate, or may require that we conduct additional studies; • the FDA or other relevant foreign regulatory authorities may not accept data generated from our clinical trial sites; • the CROs that we retain to conduct clinical trials may take actions outside of our control, or otherwise commit errors or breaches of protocols, that adversely impact our clinical trials and ability to obtain market approvals; • if our NDA or other foreign application is reviewed by an advisory committee, the FDA or other relevant foreign regulatory authority, as the case may be, may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA or other relevant foreign regulatory authority, as the case may be, require, as a condition of approval, additional nonclinical studies or clinical trials, limitations on approved labeling, or distribution and use restrictions; • the FDA or other relevant foreign regulatory authorities may require development of a Risk Evaluation and Mitigation Strategy (REMS), or its equivalent, as a condition of approval; • the FDA or other relevant foreign regulatory authorities may require additional post-marketing studies and/or a patient registry, which would be costly; • the FDA or other relevant foreign regulatory authorities may find the chemistry, manufacturing, and controls data insufficient to support the quality of our product candidates; • the FDA or other relevant foreign regulatory authorities may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers; • the FDA or other relevant foreign regulatory authorities may change their approval policies or adopt new regulations; • the FDA’s or the applicable foreign regulatory authority’s non-approval of the formulation, dosing, labeling, or specifications; • the FDA’s or the applicable foreign regulatory authority’s failure to approve the manufacturing processes of third-party manufacturers upon which we rely or the failure of the facilities of our third-party manufacturers to maintain a compliance status acceptable to the FDA or the applicable foreign regulatory authority; or • the potential for approval policies or regulations of the FDA or the applicable foreign regulatory authorities to significantly change in a manner rendering our clinical data insufficient for approval.
The FDA or any foreign regulatory authorities can delay, limit, or deny approval of expanded labels for our products or our product candidates for many reasons, including: • our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory authority that any of our product candidates is safe and effective for the requested indication; • the FDA or other relevant foreign regulatory authorities may disagree with the number, design, size, conduct, or implementation of our clinical trials; • the FDA or other relevant foreign regulatory authorities may not find the data from nonclinical studies or clinical trials sufficient to demonstrate that the clinical and other benefits of these products candidates outweigh their safety risks or that there is an acceptable risk-benefit profile; • the results of our clinical trials may not meet the level of statistical significance or clinical meaningfulness required by the FDA or other relevant foreign regulatory authorities for marketing approval; • the FDA’s or the applicable foreign regulatory authority’s requirement for additional nonclinical studies or clinical trials which would increase our costs and prolong our development timelines; 52 Table of Contents Index to Financial Statements • the FDA or other relevant foreign regulatory authorities may disagree with our interpretation of data or significance of results from the nonclinical studies and clinical trials of any product or product candidate, or may require that we conduct additional studies; • the FDA or other relevant foreign regulatory authorities may not accept data generated from our clinical trial sites; • the CROs that we retain to conduct clinical trials may take actions outside of our control, or otherwise commit errors or breaches of protocols, that adversely impact our clinical trials and ability to obtain market approvals; • if our NDA or other foreign application is reviewed by an advisory committee, the FDA or other relevant foreign regulatory authority, as the case may be, may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA or other relevant foreign regulatory authority, as the case may be, require, as a condition of approval, additional nonclinical studies or clinical trials, limitations on approved labeling, or distribution and use restrictions; • the FDA or other relevant foreign regulatory authorities may require development of a Risk Evaluation and Mitigation Strategy (REMS), or its equivalent, as a condition of approval; • the FDA or other relevant foreign regulatory authorities may require additional post-marketing studies and/or a patient registry, which would be costly; • the FDA or other relevant foreign regulatory authorities may find the chemistry, manufacturing, and controls data insufficient to support the quality of our product candidates; • the FDA or other relevant foreign regulatory authorities may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers; • the FDA or other relevant foreign regulatory authorities may change their approval policies or adopt new regulations; • the FDA’s or the applicable foreign regulatory authority’s non-approval of the formulation, dosing, labeling, or specifications; • the FDA’s or the applicable foreign regulatory authority’s failure to approve the manufacturing processes of third-party manufacturers upon which we rely or the failure of the facilities of our third-party manufacturers to maintain a compliance status acceptable to the FDA or the applicable foreign regulatory authority; or • the potential for approval policies or regulations of the FDA or the applicable foreign regulatory authorities to significantly change in a manner rendering our clinical data insufficient for approval.
Depending on the extent of these or any other FDA-required studies, approval of any NDA for any other applications that we submit may be delayed by several years, or may require us to expend more resources than we have available.
Depending on the extent of these or any other FDA-required studies, approval of any NDA, sNDA or any other applications that we submit may be delayed by several years, or may require us to expend more resources than we have available.
Certain issued U.S. patents that we have licensed from Hengrui relating to, among other things, treatment of several diseases or disorders, including various cancers, allograft rejection, graft versus host disease, rheumatoid arthritis, atopic dermatitis, and psoriasis with ivarmacitinib, or bisulfate and crystal forms thereof, are currently projected to expire beginning in 2033.
Certain issued U.S. patents that we have licensed from Hengrui relating to, among other things, treatment of several diseases or disorders, including various cancers, allograft rejection, graft versus host disease, rheumatoid arthritis, atopic dermatitis, and psoriasis with ivarmacitinib, or bisulfate and crystal forms thereof, are currently projected to expire beginning in December 2032.
These transactions would entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business, and diversion of our management’s time and attention in order to manage a collaboration or develop acquired products, product candidates or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the collaboration or combining the operations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business.
These transactions would entail numerous operational and financial risks, including exposure to unknown liabilities, disruption of our business, and diversion of our management’s time and attention in order to manage a collaboration or develop acquired products, product candidates or technologies, incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected collaboration, acquisition or integration costs, write-downs of assets or goodwill or impairment charges, increased amortization expenses, difficulty and cost in facilitating the 62 Table of Contents Index to Financial Statements collaboration or combining the operations and personnel of any acquired business, impairment of relationships with key suppliers, manufacturers or customers of any acquired business due to changes in management and ownership and the inability to retain key employees of any acquired business.
Any of these events could prevent us from achieving or maintaining market acceptance and could significantly harm our business, results of operations, and prospects. As a company, we have obtained marketing approval for only one product and we may be unable to successfully obtain marketing approval in a timely manner, or at all, for any of our other product candidates.
Any of these events could prevent us from achieving or maintaining market acceptance and could significantly harm our business, results of operations, and prospects. As a company, we have obtained marketing approval for only two products and we may be unable to successfully obtain marketing approval in a timely manner, or at all, for any of our other product candidates.
Our prior losses, combined with anticipated future losses, have had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital. 38 Table of Contents Index to Financial Statements We may encounter unforeseen expenses, difficulties, complications, delays, and other known or unknown factors in achieving our business objectives.
Our prior losses, combined with anticipated future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. 42 Table of Contents Index to Financial Statements We may encounter unforeseen expenses, difficulties, complications, delays, and other known or unknown factors in achieving our business objectives.
As of December 31, 2022, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying consolidated financial statements with respect to these contingent payments.
As of December 31, 2023, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying consolidated financial statements with respect to these contingent payments.
In addition, pharmaceutical manufacturing facilities are 61 Table of Contents Index to Financial Statements continuously subject to inspection by the FDA and foreign regulatory authorities before and after product approval.
In addition, pharmaceutical manufacturing facilities are 68 Table of Contents Index to Financial Statements continuously subject to inspection by the FDA and foreign regulatory authorities before and after product approval.
FDA guidelines and requirements, and the quantity of production; • our ability to obtain funding to develop our product candidates and operate our business; 40 Table of Contents Index to Financial Statements • expenditures that we will or may incur to acquire or develop additional product candidates and technologies, which may include obligations to make significant upfront and milestone payments; • potential side effects of any current and future products and product candidates that could delay or prevent commercialization or cause an approved product to be taken off the market; • our dependency on Contract Research Organizations (CROs) to help manage our clinical trials, and third-party manufacturers for adequate supply or manufacturing capabilities; • our ability to establish and maintain collaborations, licensing, or other arrangements; • our ability to maintain and enforce our intellectual property position; • costs related to and outcomes of potential litigation or other disputes; • our ability to adequately support future growth; • our ability to attract and retain key personnel to manage our business effectively; • potential liabilities associated with hazardous materials; • our ability to maintain adequate insurance policies; and • future accounting pronouncements or changes in our accounting policies.
FDA guidelines and requirements, and the quantity of production; • our ability to obtain funding to develop our products and product candidates and operate our business; • expenditures that we will or may incur to acquire or develop additional product candidates and technologies, which may include obligations to make significant upfront and milestone payments; • potential side effects of any current and future products and product candidates that could delay or prevent commercialization or cause an approved product to be taken off the market; • our dependency on Contract Research Organizations (CROs) to help manage our clinical trials, and third-party manufacturers for adequate supply or manufacturing capabilities; • our ability to establish and maintain collaborations, licensing, or other arrangements; • our ability to maintain and enforce our intellectual property position; • costs related to and outcomes of potential litigation, potential government investigations, or other disputes; • our ability to adequately support future growth; • our ability to attract and retain key personnel to manage our business effectively; • potential liabilities associated with hazardous materials; • our ability to maintain adequate insurance policies; and • future accounting pronouncements or changes in our accounting policies.
As a result, there is no guarantee that our clinical trials will produce the same statistically significant results in IGA Success, which will serve as the primary endpoint, as our prior clinical trials, and there can be no guarantee that the characteristics of the population enrolled in our clinical trials does not adversely impact the results reported for such trial, any of which could have an adverse effect on our ability to secure regulatory approval for our product candidates.
There can be no guarantee that clinical trials will produce the same statistically significant results in IGA Success, which may serve as the primary endpoint, as prior clinical trials, and there can be no guarantee that the characteristics of the population enrolled in any clinical trial does not adversely impact the results reported for such trial, any of which could have an adverse effect on our ability to secure regulatory approval for our product candidates.
Due to the recently initiated commercialization of ZORYVE and our continued development of our pipeline of product candidates through clinical trials, our capital requirements are difficult to predict and may change.
Due to the recently initiated commercialization of ZORYVE cream and foam, and our continued development of our pipeline of product candidates through clinical trials, our capital requirements are difficult to predict and may change.
The FDA and other foreign regulatory authorities strictly regulate the marketing of and promotional claims that are made about drug products. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other foreign regulatory authorities as reflected in the product’s approved labeling.
The FDA and other foreign regulatory authorities strictly regulate the marketing of and promotional claims that are made about drug products. In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other foreign regulatory authorities as consistent with the product’s approved labeling.
We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States, including in Canada and Europe.
We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States, including in Canada, the Caribbean, Australia and Europe.
In cases where data from foreign clinical trials are intended to serve as the sole basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the U.S. population and U.S. medical practice; (ii) the trials were performed by clinical investigators of recognized competence and pursuant to GCP regulations; and (iii) the data may be considered valid without the need for an on-site inspection by the FDA, or if the FDA considers such inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means.
In cases where data from foreign clinical trials are intended to serve as the sole basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the U.S. population and U.S. medical practice; (ii) the trials were performed by clinical investigators of recognized competence and pursuant to GCP regulations; and (iii) the data may be considered valid without the need for an on- 81 Table of Contents Index to Financial Statements site inspection by the FDA, or if the FDA considers such inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means.
For example, the FDA-approved label for ZORYVE is limited to the topical treatment of plaque psoriasis, including intertriginous areas, in patients 12 years of age and older, and we are not permitted to promote ZORYVE for any other uses, unless and until such uses are approved.
For example, the FDA-approved label for ZORYVE cream is limited to the topical treatment of plaque psoriasis, including intertriginous areas, in patients 6 years of age and older, and we are not permitted to promote ZORYVE cream for any other uses, unless and until such uses are approved.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict, including the following: • our ability to commercialize approved products and our ability to receive approval and commercialize our product candidates both within and outside of the United States; • market acceptance of any current and future products and our ability to forecast demand for such products; • the level of demand for any current and future products, which may vary significantly; • the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for any current or future products; • the willingness of patients to pay out-of-pocket for any current or future products in the absence of health insurance coverage or sufficient reimbursement; • delays in the commencement, enrollment, and the timing of clinical testing for our product candidates, in light of the COVID-19 pandemic, competing trials or otherwise; • the timing and success or failure of clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners; • any delays in regulatory review and approval of product candidates in clinical development, or failure to obtain such approvals; • the timing and cost of, and level of investment in, research and development activities relating to our product candidates, which may change from time to time and are subject inflation and other drivers; • the cost of manufacturing any current and future products and product candidates, which may vary depending on U.S.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict, including the following: • our ability to commercialize approved products and our ability to receive approval and commercialize our product candidates both within and outside of the United States; • market acceptance of any current and future products and our ability to forecast demand for such products; • the level of demand for any current and future products, which may vary significantly; • the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for any current or future products; 44 Table of Contents Index to Financial Statements • the willingness of patients to pay out-of-pocket for any current or future products in the absence of health insurance coverage or sufficient reimbursement; • delays in the commencement, enrollment, and the timing of clinical testing for our product candidates, in light of competing trials or otherwise; • the timing and success or failure of clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners; • any delays in regulatory review and approval of product candidates in clinical development, or failure to obtain such approvals; • the timing and cost of, and level of investment in, research and development activities relating to our product candidates, which may change from time to time and are subject inflation and other drivers; • the cost of manufacturing any current and future products and product candidates, which may vary depending on U.S.
For example, if a third-party files an abbreviated NDA, or ANDA, for a generic drug bioequivalent to ZORYVE, roflumilast cream, roflumilast foam, ARQ-252, or ARQ-255, and relies in whole or in part on studies conducted by or for us, the third-party will be required to certify to the FDA that either: (1) there is no patent information listed in the FDA’s Orange Book with 65 Table of Contents Index to Financial Statements respect to our NDA for the applicable approved drug candidate; (2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third-party’s generic drug.
For example, if a third-party files an abbreviated NDA, or ANDA, for a generic drug bioequivalent to ZORYVE cream, ZORYVE foam, ARQ-252, or ARQ-255, and relies in whole or in part on studies conducted by or for us, the third-party will be required to certify to the FDA that either: (1) there is no patent information listed in the FDA’s Orange Book with respect to our NDA for the applicable approved drug candidate; (2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third-party’s generic drug.
The degree of market acceptance will depend on a number of factors, including but not limited to: 44 Table of Contents Index to Financial Statements • the safety, efficacy, risk-benefit profile, and potential advantages compared to alternative or existing treatments, such as steroids topical treatments, oral treatments, and biologic injections for the treatment of psoriasis, which physicians may perceive to be adequately effective for some or all patients; • the prevalence and severity of any side effects and the difficulty of, or costs associated with, resolving such side effects; • the content of the approved product label, including any limitations or warnings contained in the labeling approved by FDA or other applicable foreign regulatory authorities; • any restrictions on the use of our products; • the effectiveness of our sales and marketing efforts; • the strength of our marketing and distribution support; • the cost of treatment in relation to alternative treatments, including any similar generic treatments and over-the-counter (OTC) treatments; • our ability to offer our products for sale at competitive prices; • the convenience and ease of administration compared to alternative treatments; • the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies over existing therapies; • the availability of coverage and adequate reimbursement from private third-party payers and governmental healthcare programs, such as Medicare and Medicaid; • the willingness of patients to pay out-of-pocket in the absence of health insurance coverage or sufficient reimbursement; • utilization controls imposed by third-party payers, such as prior authorizations and step edits; and • the impact on our business, including our sales, marketing and commercialization activities, of the COVID-19 pandemic and the impact of the pandemic on physicians' practices and their ability to see patients and prescribe our products.
The degree of market acceptance will depend on a number of factors, including but not limited to: 49 Table of Contents Index to Financial Statements • the safety, efficacy, risk-benefit profile, and potential advantages compared to alternative or existing treatments, such as steroids topical treatments, oral treatments, and biologic injections for the treatment of psoriasis, which physicians may perceive to be adequately effective for some or all patients; • the prevalence and severity of any side effects and the difficulty of, or costs associated with, resolving such side effects; • the content of the approved product label, including any limitations or warnings contained in the labeling approved by FDA or other applicable foreign regulatory authorities; • any restrictions on the use of our products; • the effectiveness of our sales and marketing efforts; • the strength of our marketing and distribution support; • the cost of treatment in relation to alternative treatments, including any similar generic treatments and over-the-counter (OTC) treatments; • our ability to offer our products for sale at competitive prices; • the convenience and ease of administration compared to alternative treatments; • the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies over existing therapies; • the availability of coverage and adequate reimbursement from private third-party payers and governmental healthcare programs, such as Medicare and Medicaid; • the willingness of patients to pay out-of-pocket in the absence of health insurance coverage or sufficient reimbursement; and • utilization controls imposed by third-party payers, such as prior authorizations and step edits.
Further, while we maintain liability coverage for network security and data breaches, we cannot be certain that our coverage is adequate for all material incidents or losses incurred. If such an event were to occur, it could result in a material disruption of our product development programs and commercial operations.
Further, while we maintain liability coverage, we cannot be certain that our coverage is adequate for all material incidents or losses incurred. If such an event were to occur, it could result in a material disruption of our product development programs and commercial operations.
Any failure or perceived failure by us to comply with federal, state or foreign laws or regulation, our internal policies and procedures or our contracts governing our processing of personal information could result in negative publicity, government investigations and enforcement actions, claims by third parties and damage to our reputation, any of which could have a material adverse effect on our operations, financial performance and business.
Any failure or perceived failure by us to comply with federal, state or foreign laws or regulation, our internal policies and procedures or our contracts 65 Table of Contents Index to Financial Statements governing our processing of personal information could result in negative publicity, government investigations and enforcement actions, claims by third parties and damage to our reputation, any of which could have a material adverse effect on our operations, financial performance and business.
With respect to any AZ-Licensed Products we commercialize under the 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.
With 57 Table of Contents Index to Financial Statements respect to any AZ-Licensed Products we commercialize under the 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.
These changes include the Budget Control Act of 2011, which, among other things, resulted in reductions to Medicare payments to providers that will remain in effect through 2031, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022; the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years; the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, ended the use of the sustainable growth rate formula and provides for a 0.5% update to physician payment rates for each calendar year through 2019, after which there will be a 0% annual update each year through 2025; and the American Rescue Plan Act of 2021, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, beginning January 1, 2024.
These changes include the Budget Control Act of 2011, which, among other things, resulted in reductions to Medicare payments to providers that will remain in effect through 2031, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022; the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years; the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things, ended the use of the sustainable growth rate formula and provides for a 0.5% update to physician payment rates for each calendar year through 2019, after which there will be a 0% annual update each year through 2025; and the American Rescue Plan Act of 2021, which eliminated the statutory Medicaid drug rebate cap, beginning January 1, 2024.
The FDA may also require a REMS as a condition of approval of our drug product candidates, such as roflumilast foam, ARQ-252, ARQ-255 and ARQ-234, which could include requirements for a medication guide, physician communication plans, or additional elements to assure safe use, such as restricted distribution methods, patient registries, and other risk minimization tools.
The FDA may also require a REMS as a condition of approval of our products and product candidates, such as ZORYVE, ARQ-252, ARQ-255 and ARQ-234, which could include requirements for a medication guide, physician communication plans, or additional elements to assure safe use, such as restricted distribution methods, patient registries, and other risk minimization tools.
Regardless of the merits or eventual outcome, liability claims may result in: • decreased demand for ZORYVE or our current or future product candidates; • injury to our reputation; • withdrawal of clinical trial participants; • costs to defend the related litigation; • a diversion of management’s time and our resources; • substantial monetary awards to trial participants or patients; 57 Table of Contents Index to Financial Statements • regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions; • loss of revenue; and • the inability to commercialize ZORYVE or our current or any future product candidates.
Regardless of the merits or eventual outcome, liability claims may result in: • decreased demand for ZORYVE or our current or future product candidates; • injury to our reputation; • withdrawal of clinical trial participants; • costs to defend the related litigation; • a diversion of management’s time and our resources; • substantial monetary awards to trial participants or patients; • regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions; • loss of revenue; and • the inability to commercialize ZORYVE or our current or any future product candidates.
In addition, even where the foreign study data are not intended to serve as the sole basis for approval, the FDA will not accept the data as support for an application for marketing approval unless the study is well-designed and well-conducted in accordance with GCP requirements and the FDA is able to validate the data from the study through an onsite inspection if deemed necessary.
In addition, even where the foreign study data are not intended to serve as the sole basis for approval, if the study was not otherwise subject to an IND, the FDA will not accept the data as support for an application for marketing approval unless the study was well-conducted in accordance with GCP requirements and the FDA is able to validate the data from the study through an onsite inspection if deemed necessary.
Among the provisions of the ACA of importance to ZORYVE and our potential product candidates are the following: • an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents; • an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; • a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected; • a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; • extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations; • expansion of eligibility criteria for Medicaid programs in certain states; • expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; • a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; • 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 • an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.
Among the provisions of the ACA of importance to ZORYVE and our potential product candidates are the following: • an annual, nondeductible fee payable by any entity that manufactures or imports specified branded prescription drugs and biologic agents; • an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; • a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected; • a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; • extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations; • expansion of eligibility criteria for Medicaid programs in certain states; • expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; • a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; • 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 • an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate. 82 Table of Contents Index to Financial Statements Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA.
The availability of our competitors’ products could limit the demand and the price we are able to charge for ZORYVE or any product candidate we develop. The inability to compete with existing or subsequently introduced drugs or OTC treatments would have an adverse impact on our business, financial condition, and prospects.
The availability of our competitors’ products could limit the demand and the price we are able to charge as well as the reimbursement and quality of coverage for ZORYVE or any product candidate we develop. The inability to compete with existing or subsequently introduced drugs or OTC treatments would have an adverse impact on our business, financial condition, and prospects.
To gain approval to market our product candidates, we must provide the FDA and foreign regulatory authorities with nonclinical and clinical data that adequately demonstrate the safety and efficacy of the product for the intended indication applied for in the applicable regulatory filing.
To gain approval to expand the label of our products or market our product candidates, we must provide the FDA and foreign regulatory authorities with nonclinical and clinical data that adequately demonstrate the safety and efficacy of the product for the intended indication applied for in the applicable regulatory filing.
To the extent that we raise additional capital by issuing equity securities, our existing shareholders’ ownership may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that could harm the rights of a common shareholder.
To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that could harm the rights of a common stockholder.
A global financial crisis or global or regional political and economic instability, wars, terrorism, civil unrest, outbreaks of disease (for example, COVID-19), and other unexpected events, such as supply chain constraints or disruptions, could cause extreme volatility and disrupt our business.
A global financial crisis or global or regional political and economic instability, wars, terrorism, civil unrest, outbreaks of disease, and other unexpected events, such as supply chain constraints or disruptions, could cause extreme volatility and disrupt our business.
If a natural disaster, power outage or other event occurred, including an epidemic, pandemic or contagious disease outbreak such as COVID-19 that disrupted operations, we may experience difficulties in operating our business for a substantial period of time.
If a natural disaster, power outage or other event occurred, including an epidemic, pandemic or contagious disease outbreak that disrupted operations, we may experience difficulties in operating our business for a substantial period of time.
We are required to make additional cash payments to AstraZeneca of up to an aggregate of $5.0 million upon the achievement of specified regulatory approval milestones with respect to products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, AZ-Licensed Products, and payments up to an additional 52 Table of Contents Index to Financial Statements aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones.
We are required to make additional cash payments to AstraZeneca of up to an aggregate of $5.0 million upon the achievement of specified regulatory approval milestones with respect to products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, 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.
If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine, or criminal penalties.
If we are deemed by the FDA to have engaged in the promotion of our products for off-label use or in a manner inconsistent with approved labeling, we could be subject to FDA regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine, or criminal penalties.
We are not permitted to market any product candidates in the United States or in any foreign countries until they receive the requisite approval from the applicable regulatory authorities of such jurisdictions, including pricing approval in the EU.
We are not permitted to market expanded indications of our products or any product candidates in the United States or in any foreign countries until they receive the requisite approval from the applicable regulatory authorities of such jurisdictions, including pricing approval in the EU.
We may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including: • clinical site closures, delays to patient enrollment, subjects discontinuing treatment or follow-up visits, issues with data collection, or changes to trial protocols as a result of the COVID-19 pandemic, competing trials, or otherwise; • regulators or independent institutional review boards (IRBs) may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; • we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites or prospective CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; • clinical trials of our product candidates may produce negative or inconclusive results, including failure to demonstrate statistical significance, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs; • the number of subjects required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, participants may drop out of these clinical trials, or fail to return for post-treatment follow-up at a higher rate than we anticipate; • our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, or IRBs to suspend or terminate the trials; • our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; • regulators or IRBs may require that we or our investigators suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements, or a finding that the participants are being exposed to unacceptable health risks; • the cost of clinical trials of our product candidates may be greater than we anticipate; and 46 Table of Contents Index to Financial Statements • the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.
We may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including: • clinical site closures, delays to patient enrollment, subjects discontinuing treatment or follow-up visits, issues with data collection, or changes to trial protocols as a result of competing trials or otherwise; • regulators or independent institutional review boards (IRBs) may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; • we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites or prospective CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; • clinical trials of our product candidates may produce negative or inconclusive results, including failure to demonstrate statistical significance, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon drug development programs; • the number of subjects required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, participants may drop out of these clinical trials, or fail to return for post-treatment follow-up at a higher rate than we anticipate; • our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, or IRBs to suspend or terminate the trials; • our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; • regulators or IRBs may require that we or our investigators suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements, or a finding that the participants are being exposed to unacceptable health risks; • the cost of clinical trials of our product candidates may be greater than we anticipate; and • the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate. 51 Table of Contents Index to Financial Statements In addition, we could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the data safety monitoring board for such trial, or by the FDA or other regulatory authorities.
If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. 72 Table of Contents Index to Financial Statements Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections of domestic and foreign manufacturing facilities at various points.
If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections at domestic and foreign manufacturing facilities at various points.
Moreover, holders of approximately 10.6 million shares of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
Moreover, certain holders of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business. Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources.
Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business. 78 Table of Contents Index to Financial Statements Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources.
Such legislation could limit the price or payment for certain drugs, and a number of states are authorized to impose civil monetary penalties or pursue other enforcement mechanisms against manufacturers who fail to comply with drug price transparency requirements, including the untimely, inaccurate, or incomplete reporting of drug pricing information.
Such legislation could limit the price or payment for certain drugs, and a number of states are authorized to impose civil monetary penalties or pursue other enforcement mechanisms against manufacturers who fail to 84 Table of Contents Index to Financial Statements comply with drug price transparency requirements, including the untimely, inaccurate, or incomplete reporting of drug pricing information.
To the extent we are required to use cash from operations or the proceeds of any future financing to service our indebtedness instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry and in the economy generally.
To the extent we are required to use cash from operations or the proceeds of any future financing to service our indebtedness instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry 46 Table of Contents Index to Financial Statements and in the economy generally.
In order to effectively execute our growth strategy, we may need to identify, recruit, retain, incentivize, and integrate additional employees in order to expand our ability to: • establish and maintain relationships with development and commercialization partners; • manage our clinical trials effectively; • manage our internal development and operational efforts effectively, including in respect of product candidates; • continue to improve our operational, financial, management, and regulatory compliance controls and reporting systems and procedures, particularly as we scale our organization; and • manage our third-party supply and manufacturing operations effectively and in a cost-effective manner, while increasing production capabilities for ZORYVE and our product candidates to commercial levels.
In order to effectively execute our growth strategy, we may need to identify, recruit, retain, incentivize, and integrate additional employees in order to expand our ability to: • drive adoption, demand and reimbursement for ZORYVE and any future products and indications approved for marketing; • establish and maintain relationships with development and commercialization partners; • manage our clinical trials effectively; • manage our internal development and operational efforts effectively, including in respect of product candidates; • continue to improve our operational, financial, management, and regulatory compliance controls and reporting systems and procedures, particularly as we scale our organization; and • manage our third-party supply and manufacturing operations effectively and in a cost-effective manner, while increasing production capabilities for ZORYVE and our product candidates to commercial levels.
As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk increases that our product 70 Table of Contents Index to Financial Statements candidates or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third parties.
As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk increases that our product candidates or other business activities may be subject to claims of infringement of the patent and other proprietary rights of third parties.
The global data protection landscape is rapidly evolving, and we are or may become subject to numerous state, federal, and foreign laws, requirements and regulations governing the collection, use, disclosure, retention, 78 Table of Contents Index to Financial Statements and security of personal information, such as information that we may collect in connection with clinical trials.
The global data protection landscape is rapidly evolving, and we are or may become subject to numerous state, federal, and foreign laws, requirements and regulations governing the collection, use, disclosure, retention, and security of personal information, such as information that we may collect in connection with clinical trials.
We may be unable to obtain regulatory approval for our product candidates under applicable regulatory requirements. The denial or delay of any such approval would prevent or delay commercialization of our product candidates and adversely impact our potential to generate revenue, our business, and our results of operations.
We may be unable to obtain regulatory approval for an expansion of our product labels or approval of our product candidates under applicable regulatory requirements. The denial or delay of any such approval would prevent or delay commercialization of additional indications or our product candidates and adversely impact our potential to generate revenue, our business, and our results of operations.
There is significant regulatory risk involving our product candidates and we cannot provide assurance that any of our product candidates will obtain regulatory approval for commercialization as expected, or at all.
There is significant regulatory risk involving our products and product candidates, and we cannot provide assurance that any of our products will gain expanded labels or that our product candidates will obtain regulatory approval for commercialization as expected, or at all.
Marketing approval in one jurisdiction, including the United States, does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one jurisdiction may have a negative effect on the regulatory process in others.
Marketing approval in one jurisdiction, such as in the United States or Canada, does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one jurisdiction may have a negative effect on the regulatory process in others.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. LEGAL PROCEEDINGS We may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of our business. We are not currently a party to any material litigation or other material legal proceedings. Item 4. MINE SAFETY DISCLOSURES None. 86 Table of Contents Index to Financial Statements Part II
Biggest changeItem 3. LEGAL PROCEEDINGS We may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of our business. We are not currently a party to any material litigation or other material legal proceedings.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeSecurities Authorized for Issuance under Equity Compensation Plans The information required by this item with respect to our equity compensation plans is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates, or the Proxy Statement. 87 Table of Contents Index to Financial Statements Stock Performance Graph The graph below shows a comparison, from January 31, 2020 (the date our common stock commenced trading on Nasdaq) through December 31, 2022, of the cumulative total return to stockholders of our common stock relative to the Nasdaq Composite Index (“^IXIC”) and the Nasdaq Biotechnology Index (“^NBI”).
Biggest changeSecurities Authorized for Issuance under Equity Compensation Plans The information required by this item with respect to our equity compensation plans is incorporated by reference to our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates, or the Proxy Statement.
Prior to that time there was no public market for our common stock. Holders As of February 24, 2023, there were approximately 76 holders of record of our common stock.
Prior to that time there was no public market for our common stock. Holders As of February 21, 2024, there were approximately 71 holders of record of our common stock.
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The graph assumes that $100 was invested in each of our common stock, the Nasdaq Composite and the Nasdaq Biotechnology at their respective closing prices on January 31, 2020 and assumes reinvestment of gross dividends. The stock price performance shown in the graph represents past performance and should not be considered an indication of future stock price performance.
Removed
This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
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Cumulative Total Return Comparison 1/31/2020 (Inception) 6/30/2020 12/31/2020 6/30/2021 12/31/2021 6/30/2022 12/31/2022 Arcutis Biotherapeutics, Inc. $100.00 $138.72 $129.04 $125.18 $95.14 $97.75 $67.89 Nasdaq Composite Index $100.00 $109.92 $140.84 $158.50 $170.97 $120.52 $114.38 Nasdaq Biotechnology Index $100.00 $120.23 $133.14 $144.02 $132.30 $104.88 $117.87 88 Table of Contents Index to Financial Statements

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeInterest Expense Interest expense is related to interest incurred on our long term debt. 93 Table of Contents Index to Financial Statements Results of Operations Comparison of the Years Ended December 31, 2022 and 2021 The following table sets forth our results of operations for the periods indicated: Year Ended December 31, Change 2022 2021 $ % (in thousands) Revenues: Product revenue, net $ 3,686 $ — $ 3,686 * Total revenues 3,686 — 3,686 * Operating expenses: Cost of sales 754 — 754 * Research and development 182,435 145,558 36,877 25 % Selling, general and administrative 122,124 60,971 61,153 100 % Total operating expenses $ 305,313 $ 206,529 $ 98,784 48 % Loss from operations (301,627) (206,529) (95,098) 46 % Other income (expense): Other income, net 5,821 173 5,648 3265 % Interest expense (15,652) — (15,652) * Total other income (expense) (9,831) 173 (10,004) (5783) % Net loss $ (311,458) $ (206,356) $ (105,102) 51 % ______________ *Not applicable Product revenue, net We began recognizing 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.
Biggest changeSee Note 6 and Note 11 to the consolidated financial statements for additional information. 98 Table of Contents Index to Financial Statements Results of Operations Comparison of the Years Ended December 31, 2023 and 2022 The following table sets forth our results of operations for the periods indicated: Year Ended December 31, Change 2023 2022 $ % (in thousands) Revenues: Product revenue, net $ 29,186 $ 3,686 $ 25,500 692 % Other revenue 30,420 — $ 30,420 * Total revenues 59,606 3,686 55,920 1517 % Operating expenses: Cost of sales 4,987 754 4,233 561 % Research and development 110,575 182,435 (71,860) (39) % Selling, general and administrative 185,145 122,124 63,021 52 % Total operating expenses 300,707 305,313 (4,606) (2) % Loss from operations (241,101) (301,627) 60,526 (20) % Other income (expense): Other income, net 11,786 5,821 5,965 102 % Interest expense (29,712) (15,652) (14,060) 90 % Loss before income taxes (259,027) (311,458) 52,431 (17) % Provision for income taxes 3,113 — 3,113 * Net loss $ (262,140) $ (311,458) $ 49,318 (16) % ______________ *Not applicable Product revenue, net We began recording U.S. product revenue in the third quarter of 2022 following the FDA approval and subsequent commercial launch of ZORYVE cream in August 2022, and Canada product revenue in the second quarter of 2023 following the Health Canada approval and subsequent commercial launch of ZORYVE cream in June 2023.
Net Cash Used in Investing Activities During the year ended December 31, 2022, net cash used in investing activities was $87.2 million, which was comprised primarily of purchases of marketable securities of $415.4 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 $351.5 million.
During the year ended December 31, 2022, net cash used in investing activities was $87.2 million, which was comprised primarily of purchases of marketable securities of $415.4 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 $351.5 million.
Net Cash Provided by Financing Activities During the year ended December 31, 2022, net cash provided by financing activities was $301.8 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 year ended December 31, 2022, net cash provided by financing activities was $301.8 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.
The lease payment term for the new space began on December 30, 2020 and will terminate 91 months thereafter, with a renewal option for a term of five years. We have a one-time option to cancel the lease after month 67.
The lease payment term for the new space began on December 30, 2020 and will terminate 91 months thereafter, with a renewal option term of five years. We have a one-time option to cancel the lease after month 67.
Our internal costs are primarily related to personnel or professional services and apply across programs, and thus are not allocable on a program specific basis. We expect to continue to incur substantial research and development expenses in the future as we develop our product candidates.
Our internal costs are primarily related to personnel or professional services and apply across programs, and thus are not allocable on a program specific basis. We expect to continue to incur research and development expenses in the future as we develop our product candidates.
We recognize as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied. Product Revenue, Net We sell our product to our Customers in the United States. Our Customers subsequently resell the products to pharmacies, health care providers, and patients.
We recognize as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied. Product Revenue, Net We sell our product to our Customers in the United States and Canada. Our Customers subsequently resell the products to pharmacies, health care providers, and patients.
Cost of Sales Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our net product sales and amortization of intangible assets associated with ZORYVE.
Cost of Sales Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE cream, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our net product sales and amortization of intangible assets associated with ZORYVE.
Therefore, we used an expected dividend yield of zero. 104 Table of Contents Index to Financial Statements See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options.
Therefore, we used an expected dividend yield of zero. 108 Table of Contents Index to Financial Statements See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options.
There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims. 101 Table of Contents Index to Financial Statements Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims. 105 Table of Contents Index to Financial Statements Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
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.
Beyond ZORYVE, 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.
Pursuant to the Loan Agreement, the lenders agreed to extend term loans to us in an aggregate principal amount of up to $225.0 million, comprised of: (i) a tranche A term loan of $75.0 million, (ii) a tranche B-1 term loan of $50.0 million, (iii) a tranche B-2 term loan of up to $75.0 million, available in minimum increments of $15.0 million, and (iv) a tranche C term loan of up to $25.0 million.
The lenders agreed to extend term loans to us in an aggregate principal amount of up to $225.0 million, comprised of: (i) a tranche A term loan of $75.0 million, (ii) a tranche B-1 term loan of $50.0 million, (iii) a tranche B-2 term loan of up to $75.0 million, available in minimum increments of $15.0 million, and (iv) a tranche C term loan of up to $25.0 million.
At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of roflumilast cream, roflumilast foam, ARQ-255, and ARQ-234 or any other product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.
At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of ZORYVE cream, ZORYVE foam, ARQ-255, and ARQ-234 or any other product candidates. This is due to the numerous risks and uncertainties associated with the development of product candidates.
In accordance with ASC 606, we recognize net product revenues from sales when the Customers obtain control of our products, which typically occurs upon delivery to the Customer. Our payment terms are generally between 31 - 65 days.
In accordance with ASC 606, we recognize net product revenues from sales when the Customers obtain control of our products, which typically occurs upon delivery to the Customer. Our payment terms are generally between 30 - 65 days.
Following the closing of our IPO, the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date. Expected Term —The expected term represents the period that we expect our stock-based awards to be outstanding.
Fair value of common stock — The fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date. Expected Term —The expected term represents the period that we expect our stock-based awards to be outstanding.
We have not experienced any material differences between accrued costs as of December 31, 2022 and 2021 and actual costs incurred. 102 Table of Contents Index to Financial Statements Revenues Pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), we recognize revenue when a customer obtains control of promised goods or services.
We have not experienced any material differences between accrued costs as of December 31, 2023 and 2022 and actual costs incurred. 106 Table of Contents Index to Financial Statements Revenues Pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), we recognize revenue when a customer obtains control of promised goods or services.
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 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 as a result of the COVID-19 pandemic; • 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 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 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; • the expenses needed to attract and retain skilled personnel; and • the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio.
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 development activities of ZORYVE cream in plaque psoriasis and atopic dermatitis, ZORYVE 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; 101 Table of Contents Index to Financial Statements • 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 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 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; • the expenses needed to attract and retain skilled personnel; • the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio; and • costs associated with any adverse market conditions or other macroeconomic factors.
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 December 31, 2022, we have a letter of credit and related restricted cash account of $1.2 million.
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 December 31, 2023, we have a letter of credit and related restricted cash account of $0.9 million.
See “Risk Factors” for a discussion of the risks and uncertainties associated with the development of our product candidates. Selling, General and Administrative Expenses Our selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel.
See “Risk Factors” for a discussion of the risks and uncertainties associated with the development of our product candidates. Selling, General and Administrative Expenses Our selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel, and costs related to sales and marketing of ZORYVE cream.
Principal amounts outstanding under the Term Loans will accrue interest at a floating rate equal to the applicable rate in effect from time to time, as determined by SLR on the third business day prior to the funding date of the applicable Term Loan and on the first business day of the month prior to each payment date of each Term Loan.
Principal amounts outstanding under the Term Loans will accrue interest at a floating rate equal to the applicable rate in effect from time to time, as determined by SLR on the third business day prior to the funding date of the applicable Term Loan and on the first business day of the month prior to each payment date of each Term 102 Table of Contents Index to Financial Statements Loan.
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.
Other selling, general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for auditing, tax, and general legal services.
The net non-cash and 99 Table of Contents Index to Financial Statements other charges were primarily related to stock-based compensation expense of $32.7 million and acquired in-process research and development of $29.6 million.
The net non-cash and other charges were primarily related to stock-based compensation expense of $32.7 million and acquired in-process research and development of $29.6 million.
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 $3.5 million for 2023, and approximately $0.7 million per year for 2024 and 2025.
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 $1.9 million for 2024, and approximately $0.8 million per year for 2025 and 2026.
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.
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, so long as the debt is not accelerated.
The total commitment under the operating lease agreement is $5.8 million, including $1.0 million for each of the years 2023 through 2025, $1.1 million for each of the 100 Table of Contents Index to Financial Statements years 2026 and 2027, and $0.6 million for the year 2028. See Note 7 to the consolidated financial statements for additional information.
The total commitment under the operating lease agreement is $4.8 million, including $1.0 million for each of the years 2024 and 2025, $1.1 million for each of the years 2026 and 2027, and $0.6 million for the year 2028. See Note 7 to the consolidated financial statements for additional information.
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 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 have incurred net losses in each year since inception, including net losses of $311.5 million, $206.4 million and $135.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $719.8 million and cash, cash equivalents, restricted cash and marketable securities of $410.8 million.
We have incurred net losses in each year since inception, including net losses of $262.1 million, $311.5 million and $206.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, we had an accumulated deficit of $981.9 million and cash, cash equivalents, restricted cash and marketable securities of $272.8 million.
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.
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 ZORYVE cream in that indication, if approved. ARQ-234 could potentially be used to treat other inflammatory conditions as well.
We were in compliance with all covenants under the Loan Agreement as of December 31, 2022. In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans.
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.
Liquidity, Capital Resources and Requirements 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.
Liquidity, Capital Resources and Requirements 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, August 2022, and October 2023, our Loan 100 Table of Contents Index to Financial Statements Agreement, our ATM, and revenue from the sale of ZORYVE cream.
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 consolidated financial statements for additional information.
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.
Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. Income Taxes As of December 31, 2023, we had net deferred tax assets of $216.2 million.
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. 92 Table of Contents Index to Financial Statements Other Income, Net Other income, net primarily consists of interest income earned on our cash, cash equivalents, and marketable securities.
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, 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.
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. COVID-19 Update In March 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak.
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.
During the year ended December 31, 2020, net cash used in investing activities was $181.8 million, which was comprised primarily of purchases of marketable securities of $279.1 million, partially offset by proceeds from the maturities of marketable securities of $97.6 million.
Net Cash Provided by (Used in) Investing Activities During the year ended December 31, 2023, net cash provided by investing activities was $180.2 million, which was comprised primarily of the proceeds from the maturities of marketable securities of $406.5 million, partially offset by purchases of marketable securities of $225.8 million.
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 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% ("ZORYVE cream"), in August 2022 after obtaining our initial U.S.
During the year ended December 31, 2020, net cash used in operating activities was $113.0 million, which consisted of a net loss of $135.7 million, offset by a change in net operating assets and liabilities of $14.1 million and net non-cash charges of $8.5 million.
During the year ended December 31, 2022, net cash used in operating activities was $257.7 million, which consisted of a net loss of $311.5 million and a change in net operating assets and liabilities of $10.2 million, partially offset by net non-cash and other charges of $63.9 million.
We will continue to evaluate trends related to revenue momentum 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.
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. Other Revenue Other revenue relates primarily to the Huadong Agreement . See Note 6 to the consolidated financial statements for additional information.
We expect to incur significant commercialization expenses related to sales, marketing, manufacturing, and distribution of ZORYVE, and our product candidates and ZORYVE label extensions, if we obtain regulatory approval for them.
We expect to incur significant and prioritized commercialization expenses related to the sales, marketing, manufacturing, and distribution of ZORYVE cream and foam, while we focus our clinical development spend on ARQ-234, ARQ-255, and ZORYVE label extensions, if we obtain regulatory approval for them.
Cash Flows The following table sets forth our cash flows for the periods indicated: Year Ended December 31, 2022 2021 2020 (in thousands) Cash used in operating activities $ (257,715) $ (174,627) $ (113,033) Cash used in investing activities (87,199) (75,953) (181,824) Cash provided by financing activities 301,798 281,947 298,145 Net (decrease) increase in cash, cash equivalents and restricted cash $ (43,116) $ 31,367 $ 3,288 Net Cash Used in Operating Activities During the year ended December 31, 2022, net cash used in operating activities was $257.7 million, which consisted of a net loss of $311.5 million and a change in net operating assets and liabilities of $10.2 million, partially offset by net non-cash and other charges of $63.9 million.
Cash Flows The following table sets forth our cash flows for the periods indicated: Year Ended December 31, 2023 2022 2021 (in thousands) Cash used in operating activities $ (247,057) $ (257,715) $ (174,627) Cash provided by (used in) investing activities 180,232 (87,199) (75,953) Cash provided by financing activities 101,323 301,798 281,947 Effect of exchange rate changes on cash (50) — — Net increase (decrease) in cash, cash equivalents and restricted cash $ 34,448 $ (43,116) $ 31,367 Net Cash Used in Operating Activities 103 Table of Contents Index to Financial Statements During the year ended December 31, 2023, net cash used in operating activities was $247.1 million, which consisted of a net loss of $262.1 million and a change in net operating assets and liabilities of $23.5 million, partially offset by net non-cash and other charges of $38.6 million.
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. We evaluate if the license agreement is an acquisition of an asset or a business. To date, none of our license agreements have been considered to be an acquisition of a business.
We evaluate if the license agreement is an acquisition of an asset or a business. To date, none of our license agreements have been considered to be an acquisition of a business.
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.
As of December 31, 2023, we had $200.0 million outstanding under the Loan Agreement. We expect to continue to incur losses and significant expenses as we commercialize ZORYVE cream in psoriasis and ZORYVE foam in seborrheic dermatitis, and as we advance our product candidates and label extensions through clinical trials, regulatory submissions, and commercialization.
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.
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.
Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement.
Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement. We were in compliance with all covenants under the Loan Agreement as of December 31, 2023.
We estimate the probability of Customers paying promptly based on the percentage of discount outlined in the agreement, and deduct the full amount of these discounts from its gross product revenues and accounts receivable at the time such revenues are recognized.
We estimate the probability of Customers paying promptly based on the percentage of discount outlined in the agreement, and deduct the full amount of these discounts from its gross product revenues and accounts receivable at the time such revenues are recognized. 107 Table of Contents Index to Financial Statements Product Returns : We provide Customers a return credit in the amount of the purchase price paid by Customers for all products returned in accordance with our returned goods policy.
The deferred tax assets have been offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily composed of NOL tax carryforwards.
The deferred tax assets have been offset by a valuation allowance due to uncertainties surrounding our ability to realize these tax benefits. The deferred tax assets are primarily composed of NOL tax carryforwards. As of December 31, 2023, we had federal and state NOL carryforwards of $676.0 million and $523.3 million, respectively, available to potentially offset future taxable income.
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.
In atopic dermatitis, we have successfully completed three pivotal Phase 3 clinical trials: INTEGUMENT-1 and -2 enrolled subjects 6 years of age or older and INTEGUMENT-PED enrolled subjects between the ages of 2 and 5 years.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, restrictions on our ability to merge or consolidate with any other entity, to incur additional indebtedness, or to pay any dividends or other distributions on capital stock.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, requirements as to financial reporting and insurance and restrictions on our ability to dispose of its business or property, to change its line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on its property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock or to redeem capital stock.
We do not record a right-of-return asset. 103 Table of Contents Index to Financial Statements Chargeback : A chargeback is the difference between the manufacturer's invoice price to the wholesaler and the wholesaler’s customer's contract price.
We do not record a right-of-return asset. Chargeback : A chargeback is the difference between the manufacturer's invoice price to the wholesaler and the wholesaler’s customer's contract price. The wholesaler tracks these sales and "charges back" the manufacturer for the difference between the negotiated prices paid between the wholesaler's customers and wholesaler's acquisition cost.
Indebtedness On December 22, 2021 we entered into a Loan Agreement with SLR and the lenders party thereto.
Indebtedness On December 22, 2021, we entered into a loan and security agreement, or Loan Agreement, with SLR and the lenders party thereto. The Loan Agreement was amended and restated on January 10, 2023 to include Arcutis Canada, Inc. as a borrower and party to the Loan Agreement.
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. Prior to the initial date regulatory approval was received, costs of raw materials were recorded as research and development expense.
Prior to the date on which the initial regulatory approval was received, costs of raw materials were recorded as research and development expense.
As of December 31, 2022 and 2021, we had cash, cash equivalents, restricted cash, and marketable securities of $410.8 million and $388.6 million, respectively, and an accumulated deficit of $719.8 million and $408.3 million, respectively.
As of December 31, 2023 and 2022, we had cash, cash equivalents, restricted cash, and marketable securities of $272.8 million and $410.8 million, respectively, and an accumulated deficit of $981.9 million and $719.8 million, respectively. We maintain cash balances with financial institutions in excess of insured limits.
The increase was primarily due to an increase in compensation and personnel related expenses of $31.3 million, an increase in sales and marketing expenses of $19.4 million and an increase in professional services of $6.5 million.
The increase was primarily due to an increase in compensation and personnel related expenses of $29.4 million, an increase in sales and marketing expenses of $24.8 million and an increase in professional services of $5.6 million. These increases were primarily due to our commercialization efforts, including the hiring of our full sales force for ZORYVE cream.
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. We are also developing ARQ-252, an alternative cream formulation of ivarmacitinib for chronic hand eczema, vitiligo, and other inflammatory dermatoses.
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 first subject in the alopecia areata cohort enrolled in the second quarter of 2023.
We rely on third parties in the conduct of our nonclinical studies and clinical trials and for manufacturing and supply of our product candidates.
See “Liquidity, Capital Resources, and Requirements” below and Note 1 to the consolidated financial statements for additional information. 96 Table of Contents Index to Financial Statements We rely on third parties in the conduct of our nonclinical studies and clinical trials and for manufacturing and supply of our product candidates.
The applicable rate is a per annum interest rate equal to 7.45% plus the greater of (a) 0.10% and (b) the per 98 Table of Contents Index to Financial Statements annum rate published by the Intercontinental Exchange Benchmark Administration Ltd.
The applicable rate is a per annum interest rate equal to 7.45% plus the greater of (a) 0.10% and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. (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.
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. 97 Table of Contents Index to Financial Statements 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.
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 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.
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 cream is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use.
During the year ended December 31, 2020, net cash provided by financing activities was $298.1 million, which was comprised primarily of the net cash proceeds received from the IPO of $168.6 million and follow-on financing in October 2020 of $128.4 million.
Net Cash Provided by Financing Activities During the year ended December 31, 2023, net cash provided by financing activities was $101.3 million, which was comprised primarily of the net cash proceeds received from our October 2023 public stock offering of $95.8 million and our December 2023 sale of stock under our ATM facility of $3.1 million.
As of December 31, 2022, we also had federal and California research and development tax credit carryforwards of approximately $16.8 million and $3.6 million, respectively, available to potentially offset future federal income taxes. The federal research and development tax carryforwards, if not utilized, will expire beginning in 2037. The California research and development tax credit carryforwards are available indefinitely.
In addition, we had foreign NOL carry forwards of approximately $4.0 million as of December 31, 2023, which can be carried forward indefinitely. As of December 31, 2023, we also had federal and California research and development tax credit carryforwards of approximately $19.8 million and $4.4 million, respectively, available to potentially offset future federal income taxes.
Contractual Obligations and Contingent Liabilities The following summarizes our significant contractual obligations as of December 31, 2022: Facility Operating Lease In April 2020, we amended our lease agreement for our facility in Westlake Village, California to relocate to a new expanded space including 22,643 square feet.
During the year ended December 31, 2021, net cash provided by financing activities was $281.9 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million as well as from our debt financing in December 2021 of $72.4 million. 104 Table of Contents Index to Financial Statements Contractual Obligations and Contingent Liabilities The following summarizes our significant contractual obligations as of December 31, 2023: Facility Operating Lease In April 2020, we amended our lease agreement for our facility in Westlake Village, California to relocate to a new expanded space including 22,643 square feet.
Interest Expense Interest expense increased by $15.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, due to interest expense related to our long-term debt. See Note 8.
Interest Expense Interest expense increased by $14.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to an increase in our average long-term debt balance and the impact of higher interest rates. See Note 8 to the consolidated financial statements for additional information.
The total commitment under the Loan Agreement as of December 31, 2022 is $309.7 million, including $23.9 million for each of the years 2023 through 2026, and $213.9 million for 2027.
The undiscounted future payments of principal and interest under the Loan Agreement as of December 31, 2023 is $292.4 million, including $26.3 million for the year 2024, $26.1 million for each of the years 2025 and 2026, and $213.9 million for the year 2027.
Federal and California tax law impose significant restrictions on the utilization of NOL carryforwards in the event of a change in ownership, as defined by Internal Revenue Code Section 382 and 383. We believe the Company has had one or more such ownership changes in the past, and we may have additional ownership changes in the future.
The federal research and development tax carryforwards, if not utilized, will expire beginning in 2037. The California research and development tax credit carryforwards are available indefinitely. Federal and California tax law impose significant restrictions on the utilization of NOL carryforwards in the event of a change in ownership, as defined by Internal Revenue Code Section 382 and 383.
We have also agreed to a financial covenant whereby, beginning with the month ending December 31, 2023, we must generate net product revenue in excess of specified amounts for applicable measuring periods; 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 also agreed to a financial covenant whereby, beginning with the month ending December 31, 2023, we must generate net product revenue in excess of specified amounts for applicable measuring periods pursuant to the Loan Agreement.
The tranche A term loan was funded on December 22, 2021. 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 consolidated financial statements for additional information.
Any failure by us to raise such net cash proceeds during the specified period shall be an immediate event of default. The tranche A term loan was funded on December 22, 2021. Following the approval of ZORYVE cream, we drew down $125.0 million on the tranche B term loans, which we received in August 2022.
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.
In particular, we expect to incur research and development expenses for the pediatric and open label extension Phase 3 trials of ZORYVE cream for atopic dermatitis, phase 1 ARQ-255 study for alopecia areata, and early development of ARQ-234 for atopic dermatitis. 97 Table of Contents Index to Financial Statements 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.
The change in net operating assets and liabilities was primarily due to an increase of $17.6 million in accounts payable and accrued liabilities due to our operating expense growth and timing of payments. The net non-cash charges were primarily related to stock-based compensation expense of $7.9 million.
The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of $17.3 million, an increase in prepaid expenses and other current assets of $8.6 million, and an increase in inventories of $5.6 million, offset by an increase in accounts payable and accrued liabilities of $8.7 million.
See Note 6. 94 Table of Contents Index to Financial Statements Research and Development Expenses Year Ended December 31, Change 2022 2021 $ % (in thousands) Direct external costs: Topical roflumilast program $ 83,030 $ 89,196 $ (6,166) (7) % Topical JAK inhibitor program 4,461 11,683 (7,222) (62) % Other early stage programs 1,128 548 580 106 % In-process research and development 29,720 — 29,720 * Indirect costs: Compensation and personnel-related 41,396 28,729 12,667 44 % Other 22,700 15,402 7,298 47 % Total research and development expense $ 182,435 $ 145,558 $ 36,877 25 % ______________ *Not applicable Research and development expenses increased by $36.9 million, or 25%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
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. 99 Table of Contents Index to Financial Statements Research and Development Expenses Year Ended December 31, Change 2023 2022 $ % (in thousands) Direct external costs: Topical roflumilast program $ 35,607 $ 83,030 $ (47,423) (57) % Topical JAK inhibitor program 3,334 4,461 (1,127) (25) % Other early stage programs 5,681 1,128 4,553 404 % In-process research and development — 29,720 (29,720) (100) % Indirect costs: Compensation and personnel-related 44,613 41,396 3,217 8 % Other 21,340 22,700 (1,360) (6) % Total research and development expense $ 110,575 $ 182,435 $ (71,860) (39) % ______________ *Not applicable Research and development expenses decreased by $71.9 million, or 39%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
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 addition to the approval of ZORYVE cream for plaque psoriasis and ZORYVE foam for seborrheic dermatitis (collectively, "ZORYVE"), we are also developing ZORYVE cream for the treatment of atopic dermatitis.
(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 December 31, 2022, the rate was 11.62%. Interest payments are payable monthly following the funding of any Term Loan.
Starting in July 2023, the Secured Overnight Financing Rate (SOFR) for a term of one month was substituted for the benchmark rate. On December 31, 2023, the rate was 12.90%. Interest payments are payable monthly following the funding of any Term Loan.
The wholesaler tracks these sales and "charges back" the manufacturer for the difference between the negotiated prices paid between the wholesaler's customers and wholesaler's acquisition cost. We estimate the percentage of goods sold that are eligible for chargeback and adjust the transaction price for such discount at the time of sale to the Customer.
We estimate the percentage of goods sold that are eligible for chargeback and adjust the transaction price for such discount at the time of sale to the Customer. Co-payment Assistance : Patients who meet certain eligibility requirements may receive co-payment assistance.
The increase in sales and marketing expenses, as well as professional services, was primarily related to commercialization efforts for ZORYVE. 95 Table of Contents Index to Financial Statements Other Income, Net Other income, net increased by $5.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to the impact of rising interest rates and a larger marketable securities balance for the year ended December 31, 2022.
Other Income, Net Other income, net increased by $6.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to the impact of higher interest rates, partially offset by a lower marketable securities balance.
Under the terms of the Share Purchase Agreement, the Company 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 the Company, to launch it in the United States. 91 Table of Contents Index to Financial Statements Components of Our Results of Operations Revenue 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.
Components of Our Results of Operations Revenue Product Revenue, Net In August 2022, in conjunction with the launch of our first FDA approved product, ZORYVE cream, 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 for ZORYVE.
Co-payment Assistance : Patients who meet certain eligibility requirements may receive co-payment assistance. The Company recognizes contra-revenue expense, and adjusts the transaction price for, co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.
We recognize contra-revenue expense, and adjusts the transaction price for, co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. Rebates and Discounts: We accrue rebates for contractually agreed-upon discounts with commercial insurance companies and mandated discounts under government programs such as the Medicaid Drug Rebate Program in the United States.
These ownership changes could limit our ability to use all the Company's NOL carryforwards, credit carryforwards, or other tax attributes.
We believe the Company has had one or more such ownership changes in the past, and we may have additional ownership changes in the future. These ownership changes could limit our ability to use all the Company's NOL carryforwards, credit carryforwards, or other tax attributes. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements.
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.
In April 2023, we had our first commercial launch outside of the United States following Health Canada approval of ZORYVE cream for the treatment of plaque psoriasis in individuals 12 years or age or older. ZORYVE cream is a once-daily topical formulation of roflumilast, a highly potent and selective phosphodiesterase-4 (“PDE4”) inhibitor.
Long-Term Debt Obligations As of December 31, 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.
Long-Term Debt Obligations As of December 31, 2023, we had $200.0 million outstanding under our Loan Agreement. See Notes 1 and 8 to the consolidated financial statements for additional information.
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.
Beyond seborrheic dermatitis, we are also developing ZORYVE foam for scalp and body psoriasis and have successfully completed our pivotal Phase 3 clinical trial. We announced positive topline data in September 2022, and we plan to submit an sNDA in the second half of 2024.
In August 2022, we received an additional $125 million in proceeds (excluding debt issuance costs) under the Loan Agreement with SLR and closed a public offering of our common stock, receiving an additional $161.6 million of aggregate net proceeds. See Notes 1 and 8 to the consolidated financial statements for additional information.
In September 2023, we received an upfront net payment of $27.0 million related to the Huadong Agreement. See Note 6 to the consolidated financial statements for additional information. In October 2023, we completed a public offering of shares of our common stock and prefunded warrants to purchase shares of our common stock, and received net proceeds of $93.6 million.
Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to be over the next two years.
Our cost of sales will reflect a lower average per unit cost of materials until inventory that was previously expensed is sold, which is expected to occur over the next two years. As of December 31, 2023 and December 31, 2022, the value of this inventory, mostly at the raw materials stage, was approximately $8.7 million and $14.1 million, respectively.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeIt is difficult to predict the effect that future hedging activities would have on our operating results. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements, together with the independent registered public accounting firm report thereon, are set forth in Part IV Item 15, “Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K. Item 9.
Biggest changeFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements, together with the independent registered public accounting firm report thereon, are set forth in Part IV Item 15, “Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
In addition, as of December 31, 2022, we had $200.0 million outstanding under our Loan Agreement. Amounts outstanding under our Loan Agreement bear interest at a floating rate equal a per annum interest rate equal to 7.45% plus the greater of (a) 0.10% and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd.
In addition, as of December 31, 2023, we had $200.0 million outstanding under our Loan Agreement. Amounts outstanding under our Loan Agreement bear interest at a floating rate equal a per annum interest rate equal to 7.45% plus the greater of (a) 0.10% and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd.
As of December 31, 2022, we had cash and cash equivalents of $53.6 million, restricted cash of $1.2 million and marketable securities of $355.9 million, which consist of bank deposits, money market funds, commercial paper, government securities, and corporate debt securities. The primary objective of our investment activities is to preserve capital to fund our operations.
As of December 31, 2023, we had cash and cash equivalents of $88.4 million, restricted cash of $0.9 million and marketable securities of $183.5 million, which consist of bank deposits, money market funds, commercial paper, government securities, and corporate debt securities. The primary objective of our investment activities is to preserve capital to fund our operations.
Based on the amount outstanding under our Loan Agreement as of December 31, 2022, for every 100 basis point increase in the interest rates, we would incur approximately $2.1 million of additional annual interest expense.
As a result, we are exposed to risks related to our indebtedness from changes in interest rates. Based on the amount outstanding under our Loan Agreement as of December 31, 2023, for every 100 basis point increase in the interest rates, we would incur approximately $2.0 million of additional annual interest expense.
(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. As a result, we are exposed to risks related to our indebtedness from changes in interest rates.
(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. Starting in July 2023, the Secured Overnight Financing Rate (SOFR) for a term of one month was substituted for the benchmark rate.
Removed
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
Added
It is difficult to predict the effect that future hedging activities would have on our operating results. We are exposed to foreign currency exchange risk as our Canadian subsidiary operates with the Canadian dollar as its functional currency. The majority of our transactions occur in U.S. dollars.
Added
The fluctuation in the value of the U.S. dollar against the Canadian dollar affects the reported amounts of expenses, assets and liabilities. If we expand our international operations our exposure to exchange rate fluctuations will increase. At December 31, 2023 we had cash balances denominated in Canadian dollars of $5.2 million. We currently do not hedge any foreign currency exposure.
Added
A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have a material impact on our consolidated financial statements. 109 Table of Contents Index to Financial Statements Item 8.

Other ARQT 10-K year-over-year comparisons